Bloomberg News

Credit Swaps in U.S. Rise for Second Day as Central Banks Meet

July 31, 2012

A gauge of U.S. corporate credit risk rose for a second day as investors await central bank monetary-policy decisions and U.S. consumer spending stalls.

The Markit CDX North America Investment Grade Index, a credit-default swaps benchmark used to hedge against losses on corporate debt or to speculate on creditworthiness, climbed 1.4 basis points to a mid-price of 107.6 basis points at 5:04 p.m. in New York, according to prices compiled by Bloomberg. Contracts tied to Lowe’s Cos. (LOW:US) rose to the highest since January after Standard & Poor’s said it may cut the company’s credit rating.

The Federal Reserve began a two-day meeting in Washington today, and European Central Bank officials will announce an interest-rate decision on Aug. 2. Investors are concerned that the financial and economic turmoil in Europe will sap global profits and undermine companies’ ability to repay borrowings.

“It’s a sit-and-wait period,” William Larkin, a fixed- income money manager who helps oversee $500 million at Cabot Money Management Inc. in Salem, Massachusetts, said in a telephone interview. “The market tries not to bet against the Fed because they hold all the cards.”

Fed Chairman Ben S. Bernanke will probably forgo announcing a third round of large-scale asset purchases this week, and is more likely to wait until September to unveil plans to buy $600 billion in housing and government debt, according to median estimates of economists in a Bloomberg News survey.

Consumer Confidence

“There could be some major disruptions if there’s a policy mistake, and I think that the Fed needs to save that weapon,” Larkin said. “Why would they shoot if they don’t have a target, a major issue? There’s too many overhangs that are problematic that are facing us in the near term.”

In the U.S., consumer spending stagnated in June, even as Americans gained confidence for the first time in five months, reports from the Commerce Department and the Conference Board showed today. Household purchases, which make up 70 percent of the economy, were unchanged last month after a 0.1 percent drop in May. The median estimate of economists in a Bloomberg News survey projected a 0.1 percent increase.

The consumer confidence index rose to 65.9 this month from 62.7 in June, according to the New York-based private research group. Economists had called for a reading of 61.5, according to the median estimate in a Bloomberg News survey.

Default Premium

The default premium on the Markit CDX North America High Yield Index, a measure of U.S. speculative-grade corporate debt risk, rose 13.9 basis points to a mid-price of 580.3 basis points, after falling as much as 5 basis points earlier today, Bloomberg prices show.

In London, the Markit iTraxx Europe Index of 125 companies with investment-grade ratings rose 1.9 to 159.8. Credit-default swaps typically rise as investor confidence deteriorates and fall as it improves.

The cost to guard against losses on the debt of Lowe’s increased 4.7 basis points to a mid-price of 86.1 basis points at 5:20 p.m. in New York, Bloomberg prices show. That’s the highest since the contracts closed at 86.5 on Jan. 31.

S&P said it may lower the home-improvement retailer’s long- term credit rating, citing its “more aggressive risk appetite.” Canadian retailer Rona Inc. (RON) rejected Lowe’s C$1.76 billion takeover offer today, and the Mooresville, North Carolina-based Lowe’s said it would consider all options in continuing its pursuit of a transaction.

Credit swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt.

To contact the reporter on this story: Brooke Sutherland in New York at bsutherland7@bloomberg.net

To contact the editor responsible for this story: Alan Goldstein at agoldstein5@bloomberg.net


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Companies Mentioned

  • LOW
    (Lowe's Cos Inc)
    • $52.51 USD
    • -0.03
    • -0.06%
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