U.S. Credit Swaps Surge

Cost of protecting corporate bonds in U.S. spurred by debt crisis in Europe.

The cost of protecting corporate bonds from default in the U.S. rose by the most since March 21 on signs Europe’s sovereign debt crisis is worsening.

The Markit CDX North America Investment Grade Index, which investors use to hedge against losses on corporate debt or to speculate on creditworthiness, increased 2 basis points to a mid-price of 91.8 basis points as of 4:41 p.m. in New York, according to index administrator Markit Group Ltd.

The credit swaps index, which typically rises as investor confidence deteriorates and falls as it improves, reached the highest since April 26 after Spanish Prime Minister Jose Luis Rodriguez Zapatero’s Socialist party suffered its worst defeat in more than 30 years in local elections amid a backlash over austerity measures. The gauge has increased from 88.6 basis points on May 19, the day before Standard & Poor’s revised Italy’s credit-rating outlook to negative from stable.

“The market seems to be taking a page right out of last year’s playbook,” Michael Reiner, a New York-based credit strategist at Societe Generale SA, said in a note dated today. “Fears of euro sovereign contagion, combined with ratings actions on Greece and Italy, are putting substantial pressure on global equities and commodities, in turn leading to weakness in U.S. credit.”

Greece’s credit rating was put on watch for possible downgrade by Moody’s Investors Service and Standard & Poor’s on May 9. A Federal Reserve Bank of Chicago economic gauge unexpectedly dropped below zero, pushing the S&P 500 Index to the lowest level in more than a month.

The cost of insuring euro-region government debt rose, according to data provider CMA. Credit-default swaps on Greece soared 54 basis points to a record 1,400.6, according to data provider CMA. Ireland jumped 13.5 to 654.1, Portugal gained 25 to 664.5, while Italy increased 9.9 to 170.6 and Spain climbed 10.8 to 272.8, according to CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market.

The price of Markit’s CDX North America High Yield Index, which falls as investor confidence deteriorates, declined 0.4 percentage point to 101.9 percent of face value.

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.

Bloomberg News


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