Bloomberg News

Credit-Default Swaps in U.S. Fall as Merkel Supports Bond Buying

August 06, 2012

A benchmark gauge of U.S. corporate debt risk dropped to a more than 13-week low as German Chancellor Angela Merkel’s government backed the European Central Bank’s bond-buying plan.

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, decreased 0.8 basis point to a mid-price of 102.8 basis points, according to prices compiled by Bloomberg. A basis point equals $1,000 annually on a contract protecting $10 million of debt.

The index, which typically falls as investor confidence improves, declined after the German government said for the first time it supports ECB President Mario Draghi’s bond-buying proposals to help lower borrowing costs in Spain and Italy. The government is “not worried” by Draghi’s Aug. 2 announcement, Georg Streiter, Merkel’s deputy spokesman, told reporters in Berlin today when asked whether the government is concerned that ECB independence might be compromised.

“Merkel’s commentary plus benign earnings reports seem to be working for credit investors right now,” said Joel Levington, managing director of corporate credit at Brookfield Investment Management Inc. in New York.

Two-thirds of companies in the Standard & Poor’s 500 Index have reported second-quarter earnings that beat analysts’ estimates, according to data compiled by Bloomberg.

Increasing Employment

The swaps gauge dropped 5.3 basis points on Aug. 3 after Labor Department data showed employment increased by 163,000 last month, helped by a pickup at automakers and health-care providers. The median estimate of 89 economists surveyed by Bloomberg called for a rise of 100,000.

Part of the decline today was a continuation of positive sentiment from the jobs report, Adrian Miller, director of global markets strategy at GMP Securities LLC in New York, said in an e-mail.

Greek Prime Minister Antonis Samaras must complete an 11.5 billion-euro package of budget cuts for 2013 and 2014 to maintain access to the nation’s 240 billion euros ($298 billion) of rescue funds. Representatives from the so-called troika of the European Commission, European Central Bank and International Monetary Fund, which completed almost two weeks of meetings in Athens yesterday, will return in early September.

Credit swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt.

To contact the reporter on this story: Mary Childs in New York at mchilds5@bloomberg.net

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


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