Credit Swaps in U.S. Decline to One-Week Low on Labor Strength

A benchmark gauge of U.S. credit risk dropped to the lowest level in more than a week as economic reports showed a strengthening U.S. labor market and growing consumer confidence.

The Markit CDX North America Investment Grade Index of credit-default swaps, which investors use to hedge against losses on corporate debt or to speculate on creditworthiness, dropped 1.5 basis points to 96.3 basis points at 4:54 p.m. in New York, according to Markit Group Ltd. That’s the lowest since Feb. 14.

Traders pushed down the gauge, which typically falls as confidence in U.S. companies improves and rises as it deteriorates, after Labor Department figures showed today that applications for unemployment insurance benefits were unchanged in the week ended Feb. 18 at 351,000, the fewest since March 2008. Swaps on American International Group Inc. (AIG), the bailed-out insurer, dropped 18 basis points to 276 after it reported a fourth-quarter profit.

Consumers grew more optimistic as stocks gained this year, with the Dow Jones Industrial Average climbing 3.4 percent in January. The Bloomberg Consumer Comfort Index rose to minus 38.4 in the week ended Feb. 19, the strongest reading since April 2008. A majority of consumers rated their personal finances as positive for the first time since July.

AIG’s net income rose to $19.8 billion, or $10.43 a share, from $11.2 billion, or $16.60, a year earlier, when the insurer booked gains from the sale of businesses, according to a statement today from the New York-based company. AIG posted a tax benefit of about $17.7 billion.

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 that’s protecting $10 million of debt.

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