Bloomberg News

Credit Swaps in U.S. Fall as Hiring Rises, Manufacturing Expands

February 01, 2013

A gauge of U.S. corporate credit risk fell for a second day after hiring in the U.S. increased and factory activity accelerated in January.

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, dropped 2.6 basis points to a mid-price of 86.2 basis points at 4:44 p.m. in New York, according to prices compiled by Bloomberg. The measure has declined from 90.3 basis points on Jan. 30, the highest level since Dec. 31.

Payrolls increased by 157,000 last month, Labor Department figures showed today in Washington. The increase followed a revised 196,000 advance in the prior month. The unemployment rate in January rose to 7.9 percent from 7.8 percent. Signs that the labor market is improving may ease investor concern that companies’ will struggle to repay debt.

“The data is pretty meaningful in the sense it signifies more of a risk-on attitude. The strong job numbers are indicating that the economy is improving, however it’s still somewhat sluggish,” Jody Lurie, a corporate credit analyst at Janney Montgomery Scott LLC in Philadelphia, said in a telephone interview.

Manufacturing in the U.S. expanded more than forecast in January, reaching a nine-month high and showing the industry is starting to improve.

Industry Expansion

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.

The Institute for Supply Management’s manufacturing index climbed to 53.1 last month from December’s 50.2, the Tempe, Arizona-based group’s report showed today. Readings above 50 signal expansion. The median forecast from a Bloomberg survey of 86 economists was 50.7.

The risk premium on the Markit CDX North American High Yield Index decreased 11 basis points to 435 basis points, Bloomberg prices show.

The average relative yield on junk-rated debt fell 0.8 basis point to 471.6 basis points, according to Bloomberg data.

High-yield, high-risk debt is rated below Baa3 by Moody’s Investors Service and lower than BBB- at Standard & Poor’s. A basis point is 0.01 percentage point.

To contact the reporter on this story: Madhura Karnik in New York at mkarnik@bloomberg.net

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


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