U.S. Credit Default Swaps Rise

As GDP rises and jobs numbers improve, investors weigh the effect on corporate creditworthiness of prospective quantitative easing by the Fed.

A gauge of corporate credit risk in the U.S. rose as investors weighed jobs and growth data before the Federal Reserve’s statement on the outlook for stimulus.

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, increased 0.5 basis point to a mid-price of 76.1 basis points at 1:09 p.m. in New York, according to prices compiled by Bloomberg.

Signs the world’s largest economy is recovering may lead the Fed to begin curtailing $85 billion in monthly asset purchases, which have bolstered credit markets. U.S. companies boosted jobs in July by the most this year, and the economy grew more than economists projected in the second quarter.

“There are two fundamental things that are driving the market: economic numbers and Fed speak,” Rajeev Sharma, who manages $1.5 billion of fixed-income assets at First Investors Management Co., said in a telephone interview from New York. “The jobs and U.S. growth numbers are stronger than expected today, and add to the feeling that there will be tapering at some point this year.”

 

Job Gains

The credit-swaps index 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 debt.

U.S. businesses added 200,000 new jobs in July, compared with a revised 198,000 gain in June, according to figures from Roseland, New Jersey-based ADP Research Institute. The median estimate of 40 economists surveyed by Bloomberg called for an increase of 180,000.

Gross domestic product, the value of all goods and services produced in the U.S., rose at a 1.7 percent annualized rate in the second quarter after a revised 1.1 percent gain in the prior period. A Bloomberg survey of 85 analysts forecast annualized growth of 1 percent.

The Fed will maintain the pace of its bond buying at the conclusion of its two-day Federal Open Market Committee meeting today, according to 54 economists in a Bloomberg survey. The central bank is scheduled to release its policy statement at 2 p.m. in Washington.

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