Bloomberg News

U.S. Corporate Credit Swaps Fall as Europe Leaders Debate Plan

September 04, 2012

A gauge of U.S. company credit risk fell as European leaders debate a bond-buying program to address the region’s fiscal crisis.

The Markit CDX North America Investment Grade Index, a credit-default swaps benchmark that investors use to hedge against losses on corporate debt or to speculate on creditworthiness, decreased 0.8 basis point to a mid-price of 101 basis points, the lowest in about a week, according to prices compiled by Bloomberg.

European chiefs are meeting in Rome and Berlin today, two days before the European Central Bank holds its policy meeting, amid investor concern that further economic weakness will pressure companies’ ability to repay debt obligations. ECB President Mario Draghi said the bank’s primary mandate compels it to intervene in bond markets to wrest back control of interest rates and ensure the euro’s survival.

“The consensus seems to think that Draghi will deliver details of a bond-buying program,” said Adrian Miller, director of global markets strategy at GMP Securities LLC in New York. “If he does follow through with that, that will obviously be a positive and spreads should tighten further.”

Draghi told lawmakers in a closed-door session at the European Parliament in Brussels yesterday that the bank has lost control of borrowing costs in the 17-nation monetary union. Bloomberg News obtained a recording of his comments, some of which were published by Italian news agency AGI yesterday. Draghi’s comments come before the ECB’s Governing Council is due to decide on his bond-buying proposal.

U.S. Manufacturing

The swaps index, which typically falls as investor confidence improves and rises as it deteriorates, has dropped from a two-week high of 102.9 on Aug. 30. U.S. bond markets were closed yesterday for the Labor Day public holiday.

Corporate issuers led by Deere & Co. and Honda Motor Co. offered the most dollar-denominated debt today in almost six months after yields on U.S. investment-grade bonds dropped to a record low.

Deere, the largest maker of agricultural equipment, and Tokyo-based Honda led borrowers selling or planning to sell at least $16.4 billion of bonds, the most since $26.9 billion on March 5, according to data compiled by Bloomberg. Sales this year have averaged $5.7 billion per day while August issuance, the busiest on record for the month, averaged $5 billion.

Manufacturing in the U.S. contracted for a third month in August. The Institute for Supply Management’s factory index fell to 49.6 last month, the lowest since July 2009, the Tempe, Arizona-based group said today. Economists in a Bloomberg survey projected an August reading of 50, which is the dividing line between expansion and contraction.

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: Matt Robinson in New York at Mrobinson55@bloomberg.net

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


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