‘Wicked Rally’ in Credit Swaps on Payroll Data, Trichet Signals

The cost to protect U.S. corporate bonds from default declined from a six-week high as companies added more workers than forecast to payrolls last month, and amid speculation European Central Bank policy makers may ramp up measures to contain a sovereign debt crisis.

The Markit CDX North America Investment Grade Index, which investors use to hedge against losses on corporate debt or to speculate on creditworthiness, decreased 3.6 basis points to a mid-price of 95.8 as of 5:15 p.m. in New York, according to index administrator Markit Group Ltd. Swaps on Bank of America Corp. eased after jumping 24.6 basis points yesterday.

The decline in the index is anticipating “the ECB meeting tomorrow and the great expectation that they will be more aggressive in responding/solving or at least assuage sovereign debt fears,” Andrew Kuan, senior trader at Primus Asset Management in New York, said in an e-mail. The gauge of credit risk dropped as much as 4.7 basis points today and rose as much as 4.3 yesterday. “Add to that real lack of conviction and you get a wicked rally on some semblance of good news,” he said.

Companies in the U.S. added 93,000 workers to payrolls in November, according to figures from ADP Employer Services. That compares with a forecast gain of 70,000 jobs, according to the median estimate of 40 economists surveyed by Bloomberg News. Another report showed manufacturing expanded and the Federal Reserve’s Beige Book report said the economy gained strength.

The Markit index, which tends to fall as investor confidence improves and rise as it deteriorates, ended yesterday at 99.4 basis points, up 9.6 basis points from Nov. 19 on sovereign debt concern.

European Debt Crisis

ECB President Jean-Claude Trichet told lawmakers yesterday that he didn’t believe financial stability in the euro zone “could really be called into question,” stoking speculation policy makers meeting tomorrow may indicate their willingness to curb the spread of the region’s debt crisis.

Another report showed that U.S. manufacturing expanded for a 16th consecutive month in November. The Institute for Supply Management’s factory index was little changed at 56.6 from 56.9 in October. The figure compared with a median economist estimate of 56.5 in a Bloomberg News survey.

The Fed’s report on regional activity, known as the Beige Book, said the economy gained strength across much of the U.S. as hiring improved, manufacturing expanded and retailers anticipated a stronger holiday shopping season. The anecdotal information will help policy makers frame the discussion of the economy when they next meet on Dec. 14.

Bank of America

Credit-default swaps on Bank of America fell after surging yesterday as traders speculated WikiLeaks will release sensitive documents from one of the bank’s executives next year.

The swaps declined 14.9 basis points to 205.3, according to data provider CMA. WikiLeaks founder Julian Assange told Forbes magazine that he’ll release documents from a U.S. bank next year. Last year he said his group had a hard drive from a Bank of America executive.

Contracts on Citigroup Inc. also declined, losing 14.2 basis points to 162.4, and contracts on Goldman Sachs Group Inc. declined 10.1 basis points to 143.5, CMA data show.

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.

To contact the reporter on this story: Mary Childs in New York at mchilds5@bloomberg.net

To contact the editor responsible for this story: Alan Goldstein at agoldstein5@bloomberg.net

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