The cost of insuring against default on corporate debt rose, reversing an earlier decline, after European Central Bank President Mario Draghi said the fiscal crisis is starting to hurt Germany, Europe’s largest economy.
The Markit iTraxx Crossover Index of credit-default swaps on 50 companies with mostly high-yield credit ratings climbed as much as 18 basis points to 527, before trading at 525 at 12:09 p.m. in New York. An increase signals deterioration in perceptions of credit quality.
Economic activity in the euro area, to which Germany exports 40 percent of its goods, will remain weak and keep inflation low, Draghi said at a conference in Frankfurt today. Investors are also concerned that political gridlock in Washington may stymie growth after President Barack Obama was re-elected and Democrats retained control of the Senate, but fell short of the 60-vote “super-majority” needed to advance most legislation and Republicans kept their majority in the House of Representatives.
“Draghi’s speech today did not impress the markets and lot of it’s going to come down to Europe,” Peter Tchir, the founder of New York-based TF Market Advisors said in a telephone interview. “People realized either way not a whole lot’s going to be done.”
U.S. lawmakers will face divisive tax-and-spending issues after years of unsuccessfully trying to reduce the budget deficit. They also may have to address the so-called fiscal cliff of tax increases and spending cuts that will start in January if Congress doesn’t act in a lame-duck session beginning this month.
The cost of insuring bank debt rose on concern that Democrats including Elizabeth Warren, who beat incumbent Republican Scott Brown in Massachusetts, may advance financial industry regulation, Tchir said.
The Markit iTraxx Financial Index linked to senior debt of 25 banks and insurers rose six basis points to 175 and the subordinated index climbed eight to 304.
“There was some hope Republicans would have backed down, but with some of the people sent to Washington, especially Warren, there will be an impetus to accelerate the push back on banks,” Tchir said.
The Markit iTraxx Europe Index of 125 companies with investment-grade ratings rose three basis points to 129.
A basis point on a credit-default swap protecting 10 million euros ($12.8 million) of debt from default for five years is equivalent to 1,000 euros a year. Swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements.
To contact the reporter on this story: Abigail Moses in London at Amoses5@bloomberg.net
To contact the editor responsible for this story: Paul Armstrong at Parmstrong10@bloomberg.net