Company Default Swaps in U.S. Plunge to Lowest Level in a Year

A benchmark gauge of U.S. company credit risk fell for a ninth day in the longest stretch of declines since December 2010 after the Federal Reserve’s upgraded assessment of the world’s biggest economy drove investors to higher-risk assets.

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 3.1 basis points to a mid-price of 85.4 basis points at 4:45 p.m. in New York, reaching the lowest level in more than a year, according to Markit Group Ltd.

The gauge slid after the Federal Reserve raised its assessment of the economy last week. New York Fed President William Dudley said today in a speech on Long Island that improving economic data don’t negate “meaningful” risks to the expansion, including higher gasoline prices, fiscal cutbacks and a weak housing market.

“It’s generally a relatively healthy environment for risk taking,” Rizwan Hussain, a New York-based credit strategist at Morgan Stanley, said in a telephone interview. “The path of least resistance, at least for the near term, is tighter.”

Treasury 10-year notes fell for a ninth straight trading day as investors bet a strengthening economy will diminish the refuge appeal of U.S. government securities. Yields reached the highest since October last week after the Fed’s revised economic assessment.

Greece Auction

Sellers of credit-default swaps on Greece will have to pay as much as $2.5 billion to settle contracts triggered by the nation’s debt restructuring, after dealers agreed on a final value for Greek bonds of 21.5 percent of face value at an auction, according to administrators Markit Group Ltd. and Creditex Group Inc. That’s in line with where the notes have been trading. Traders were anticipating a swaps payout of about 80 cents, based on the price of Greece’s new 30-year securities.

The auction is “a little cathartic,” Hussain said. “It’s come and gone and not turned out to be the big stress point” that some expected.

The contracts are being settled after investors were forced to exchange their bonds at a loss in the biggest ever debt restructuring. Contracts wouldn’t have been triggered if the debt exchange had been voluntary, according to ISDA’s rules. The auction ends more than two years of speculation over whether the derivatives are reliable for insuring sovereign debt after European policy makers sought to prevent payouts on concern they’d worsen the region’s crisis.

Index Roll

The U.S. swaps index, which typically falls as investor confidence improves and rises as it deteriorates, touched 84.7 basis points, the lowest intraday level since March 9, 2011.

A new version of the index begins trading tomorrow, replacing two of the 125 companies in the benchmark in a twice- yearly “roll.” Starwood Hotels & Resorts Worldwide Inc. is being replaced by Black & Decker Corp., the toolmaker acquired by Stanley Works. Exelon Corp. will take the place of Constellation Energy Group Inc., the Baltimore-based company it acquired this month.

The new constituents don’t alter the default risk, according to a note by CreditSights Inc. strategists Isaac Codrey and Louise Purtle. The high-yield index rolls next week.

Credit-default swaps on AK Steel Corp., which pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt, dropped two percentage points to 10.5 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 $1.05 million initially and $500,000 annually to protect $10 million of AK Steel’s debt. The West Chester, Ohio-based steelmaker plans to issue $250 million of notes to repay debt, according to a prospectus filed today with the U.S. Securities and Exchange Commission.

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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