Bloomberg News

U.S. Credit Swaps Cap Biggest Weekly Drop in Year as Jobs Expand

January 04, 2013

A gauge of U.S. corporate credit risk capped the biggest weekly drop in 13 months as employers added more workers in December and the unemployment rate matched a four-year low.

The Markit CDX North American Investment Grade Index, a credit-default swaps benchmark that investors use to hedge against losses or to speculate on creditworthiness, plunged 13.9 basis points this week to a mid-price of 85.6 basis points, the largest decline since the period ended Dec. 2, 2011, according to prices compiled by Bloomberg. The index reached a more than three-month low of 85.1 basis points on Jan. 2.

Labor Department figures showed payrolls rose by 155,000 workers last month following a revised 161,000 advance in November that was more than initially estimated. The index erased an earlier increase today to as high as 87.1 basis points as Federal Reserve minutes yesterday showed policy makers began debating an end to their unprecedented bond-buying as early as this year, stoking concern that a reduction of economic stimulus might crimp the ability of companies to repay debt.

“There’s still uncertainty about how the Fed will set up their exit strategy further down the road, and if a market recovery will start to play in the policy response,” Dorian Garay, a New York-based money manager for an investment-grade debt fund at ING Investment Management, said in a telephone interview. “Despite an increase in payrolls, the unemployment rate is still way beyond the comfort zone of the Fed. It will be a bumpy road.”

Cliff Aversion

The credit-swaps index had its biggest one-day decline since November 2011 on Jan. 2 after U.S. lawmakers passed a budget deal averting tax increases for most wage earners that the Congressional Budget Office had warned may have tipped the economy into recession.

The unemployment rate held at 7.8 percent, matching the lowest since December 2008, Labor Department figures showed today in Washington. The November number was revised up from a previously reported 7.7 percent. The median estimate of 82 economists surveyed by Bloomberg called for an increase of 152,000 in payrolls.

Orders to U.S. factories were little changed in November, depressed by a drop in non-durable goods. Bookings, which include durable and non-durable goods, totaled $477.6 billion in November compared with $477.4 billion the prior month, figures from the Commerce Department showed today. Service industries in the U.S. expanded in December at the fastest pace in 10 months, the Tempe, Arizona-based Institute for Supply Management said today.

Liquidity Gauge

The credit-swaps index typically falls as investor confidence improves and rises as it deteriorates. The contracts 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.

Moody’s Investors Service’s Liquidity-Stress Index, which declines when corporations’ ability to manage cash needs appears to improve and rises when it weakens, decreased to 3.6 percent in December from 4 percent in November, remaining above the record-low 3.1 percent recorded in July.

The index “continues to suggest the default rate will remain modest in 2013,” analysts led by John Puchalla wrote in a report yesterday. Speculative-grade liquidity rating upgrades outnumbered downgrades in December, reversing a two-month trend, according to the report.

First Default

This week saw the first global corporate default of 2013, Diane Vazza, Standard & Poor’s head of global fixed-income research in New York, said in a report today. S&P lowered the corporate credit rating on a unit of LBI Media Holdings Inc. yesterday to “selective default,” after the company completed a so-called distressed exchange of about $174.6 million of notes due in 2017 for bonds that allow it to pay holders with more debt instead of cash.

The risk premium on the Markit CDX North American High Yield Index fell 1.5 basis points to 442.3 basis points today, dropping 72.2 basis points on the week, according to prices compiled by Bloomberg.

Credit swaps protecting against losses on the debt of Bausch & Lomb Inc. fell 5 basis points to 68.3 basis points as of 3:30 p.m. in New York, according to data provider CMA, which is owned by McGraw-Hill Cos. and compiles prices quoted by dealers in the privately negotiated market.

The eye-care company, which Warburg Pincus LLC is seeking to sell, has attracted interest from Abbott Laboratories, Johnson & Johnson and Sanofi, said people with knowledge of the matter. Warburg, working with Goldman Sachs Group Inc., is giving interested parties access to its financial data and seeking first-round bids by month’s end, said the people, who asked not to be named because the process is private.

To contact the reporter on this story: Julia Leite in New York at jleite3@bloomberg.net

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


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