Corporate Default Swaps Head for Biggest Monthly Rise Since May in Europe
The cost of insuring against losses on European corporate bonds rose, posting the biggest monthly increase since May, on concern a slowdown in the U.S. recovery will trigger a global double-dip recession.
The Markit iTraxx Crossover Index of credit-default swaps on 50 companies with mostly high-yield credit ratings climbed 53 basis points this month to 532, and was 7 basis points higher today, according to JPMorgan Chase & Co. at 4 p.m. in London. The gauge, which is up 100 basis points since the start of the year, pared its advance after consumer confidence and home-price increases beat economist estimates.
The road to recovery for the U.S. economy is proving hazardous with reports this week forecast to show employers cutting jobs and manufacturing slowing, after a smaller-than- forecast gain in personal incomes yesterday. The Federal Reserve “will do all that it can” to ensure the recovery continues, Chairman Ben S. Bernanke said Aug. 27.
“Investors are becoming more and more convinced that the Fed is out of ammunition and the risk of a double dip is imminent,” said Stefan Kolek, a Munich-based strategist at UniCredit SpA.
Consumer confidence in the U.S. increased to 53.5 in August from a five-month low of 51 in July, a Conference Board report showed today. The median forecast of economists in a Bloomberg News survey was for a gain to 50.7.
Case-Shiller
Data from S&P/Case-Shiller showed property values in 20 U.S. cities rose 4.2 percent in June from the same month last year, down from a 4.6 percent gain in May, a Bloomberg survey showed. The median estimate of economists surveyed by Bloomberg News called for a 3.5 percent advance.
The Tempe, Arizona-based Institute for Supply Management may say tomorrow that U.S. factories expanded at the weakest pace in almost a year. The manufacturing gauge dropped in August to 52.8 from 55.5, according to a Bloomberg News survey. Employers cut 100,000 positions in August after trimming 131,000 jobs the previous month, according to a separate survey before the Labor Department’s payrolls report Sept. 3.
Concerns about the U.S. economy overshadowed signs Germany’s recovery is strengthening. German unemployment declined for a 14th month in August after surging exports and investment fuelled record economic growth in the second quarter.
The Markit iTraxx Europe Index of 125 companies with investment-grade ratings climbed 13.25 basis points this month and 0.75 basis points today to 118.25, JPMorgan prices show. The index is up 45 basis points this year.
Financial Index
The Markit iTraxx Financial Index of 25 banks and insurers is up 32.5 basis points this month and 1.5 basis points today at 148, the highest level since July 7. The gauge has more than doubled since the start of the year.
Ireland led an increase in the cost of insuring against losses on government debt, with credit-default swaps on the nation climbing 10.5 basis points to 252, the highest level since March 2009, according to data provider CMA.
The Markit iTraxx SovX Western Europe Index of swaps on 15 governments jumped 43.25 basis points this month to 158, the biggest monthly increase since it started trading last year. The gauge is 2 basis points higher today and up from about 69 basis points at the start of the year.
Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a company fail to adhere to its debt agreements. An increase signals deterioration in perceptions of credit quality.
A basis point on a credit-default swap contract protecting $10 million of debt from default for five years is equivalent to $1,000 a year.
To contact the reporter on this story: Abigail Moses in London at Amoses5@bloomberg.net
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