Credit Swaps in U.S. Drop as Spain Meets Debt Auction Target

Some relief as Spain meets debt-auction target.

A gauge of U.S. corporate debt risk fell as Spain met a debt-auction target, easing concern that the nation would be cut off from the credit markets, and as the Federal Reserve starts a meeting to consider stimulus measures.

     The Markit CDX North America Investment Grade Index, a credit-default swaps benchmark used to hedge against losses on corporate debt or to speculate on creditworthiness, decreased 3.2 basis points to a mid-price of 116 basis points at 12:01 p.m. in New York, according to prices compiled by Bloomberg. Contracts tied to J.C. Penney Co. rose after the retailer announced yesterday that its president was leaving.

     Spain, whose 10-year bond yields climbed above 7 percent yesterday for the first time since the creation of the euro, sold 3.04 billion euros ($3.8 billion) of bills in an auction with a 3 billion-euro target. The Federal Open Market Committee begins a two-day meeting today to consider additional stimulus to counter signs of a slowing recovery amid concern that Europe’s debt crisis will contaminate the U.S. economy.

“There was good news with the auction for Spain this morning,” Scott MacDonald, head of research at MC Asset Management Holdings LLC in Stamford, Connecticut, said in a telephone interview. And speculation that the Fed will take measures to boost economic growth means “people today are probably going to look at the news more as the cup is more half- full than half-empty.”

Housing Starts

 The benchmark measure fell even as Commerce Department data showed U.S. housing starts in May declined more than forecast. Starts fell 4.8 percent to an annual pace of 708,000, compared with a revised 744,000 rate for April that was the highest since October 2008. Economists had forecast a rate of 722,000, the median of 77 estimates in a Bloomberg News survey showed.

     J.C. Penney, the fourth-largest U.S. department-store chain, said president Michael Francis will leave the Plano, Texas-based company, without giving a reason for his departure. The retailer reported a $163 million loss in the first three months of the year, its third straight quarterly loss, as revenue plunged 20 percent.

     Contracts protecting the company’s debt against default for five years increased 2.2 percentage points to 8.4 percent upfront, according to data provider CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market. That’s in addition to 5 percent a year, meaning it would cost $840,000 initially and $500,000 annually to protect $10 million of J.C. Penney’s debt.

‘Losing Patience’

     “The market is quickly losing patience with the turnaround attempts,” Adrian Miller, director of global markets strategy at GMP Securities LLC in New York, said of J.C. Penney in a telephone interview. The department-store chain must show consistent improvement before it can “regain the confidence that has obviously been lost,” he said.

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

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