Bloomberg News

Credit Swaps in U.S. Surge Most in Week Since January on Ukraine

March 14, 2014

A measure of U.S. corporate credit risk was poised for the largest weekly increase in almost two months amid turmoil in Ukraine and weaker-than-forecast economic data from China.

The Markit CDX North American Investment Grade Index, a credit-default swaps benchmark used to hedge against losses or to speculate on creditworthiness, increased 3.9 basis points for the week to 67.4 basis points as of 4:18 p.m. in New York, according to prices compiled by Bloomberg. That’s the biggest weekly rise since the period ended Jan. 24. The measure was little changed on the day.

Investors sought protection as China’s industrial output and retail-sales growth cooled more than economists estimated in January and February and as tension in Ukraine increased. U.S. Secretary of State John Kerry and Russian Foreign Minister Sergei Lavrov failed to make progress on resolving the Ukraine crisis in six hours of talks in London, as the Crimean peninsula prepared to vote on joining Russia.

“There’s a lot of exogenous factors, the Ukraine, manufacturing under-performance in China, and just general weakness that we saw in the equities markets at the start of the week that flowed into significant weakness yesterday,” Jody Lurie, a corporate-credit analyst at Janney Montgomery Scott LLC in Philadelphia, said in a telephone interview. “It’s all of those factors combined that are creating a less attractive situation, making investors shy away from risk assets and favoring Treasuries.”

ETF Flows

Russian President Vladimir Putin “is not prepared to make any decision regarding Ukraine until after the referendum on Sunday,” Kerry told a news conference after the meeting in London today.

The swaps gauge typically rises as investor confidence deteriorates and falls as it improves. 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 bonds.

U.S. exchange-traded funds that invest in the emerging markets saw a net $536.7 million outflow over the past five days, according to ETF data compiled by Bloomberg. Investors have withdrawn $12.8 billion from the funds this year.

Investors added a net $210.4 million to U.S. fixed income ETFs over the past five days, with $271.4 million going into corporate bonds, Bloomberg data show.

Bank Risk

ETF participants pulled $251 million out of U.S. ETFs that invest in China over the same five-day period, the second-highest outflow of capital among country-focused ETFs, the data show. Brazil led capital outflows, as $285 million left those funds.

The average price of credit-default swaps of the six largest banks rose 5 basis points to 75.4 basis points for the week, according to prices compiled by Bloomberg. That’s the first increase since the period ended Jan. 24.

The risk premium on the Markit CDX North American High Yield Index, tied to the debt of 100 speculative-grade companies, widened 20.2 basis points for the week to 335.1, after increasing by 2.3 today, Bloomberg prices show. Speculative-grade bonds are rated below Baa3 by Moody’s Investors Service and less than BBB- at Standard & Poor’s. A basis point is 0.01 percentage point.

The extra yield investors demand to hold investment-grade corporate bonds rather than government debt rose 0.5 basis point to 101.5 for the day, Bloomberg data show.

To contact the reporter on this story: Jessica Summers in New York at

To contact the editors responsible for this story: Shannon D. Harrington at John Parry, Chapin Wright

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