Default Swaps in U.S. Rise on Talk Greece May Exit Euro
A gauge of corporate credit risk in the U.S. increased for an eighth day, the longest streak in more than two years, as concern mounts that Greece will exit the European currency.
Debt issued by JPMorgan Chase & Co., which last week revealed a $2 billion trading loss, fell by the most since March as the cost to protect the obligations of the biggest U.S. bank increased to the highest level since December. Bonds of Chesapeake Energy Corp. fell to a record low while credit- default swaps linked to the second-largest U.S. natural-gas producer jumped by the most since 2008.
Credit markets were roiled as concern grew that a crisis of Europe’s common currency could infect the global financial system. The cost of swaps rose after European Central Bank Governing Council member Patrick Honohan said May 12 that a Greek exit from the euro “is not necessarily fatal, but it is not attractive” as the country’s leaders struggled to form a government following inconclusive elections May 6.
“The markets are a little bit more concerned about these headline macro issues than long-term fundamentals,” Guy LeBas, chief fixed-income strategist at Philadelphia-based Janney Montgomery Scott LLC, said in a telephone interview. “The biggest issue is that the country’s internal political forces have gotten vocal once again,” he said of Greece.
The Markit CDX North America Investment Grade Index, a credit-default swaps benchmark that investors use to hedge against losses on corporate debt or to speculate on creditworthiness, added 6.2 basis points, its biggest jump since Dec. 8, to a mid-price of 114.7 basis points at 5:43 p.m. in New York, according to prices compiled by Bloomberg.
The eighth consecutive daily rise was the longest stretch of advances since January 2010, while the index was at the highest level in four months.
The measure, which typically rises as investor confidence deteriorates and falls as it improves, closed at 116 basis points on Jan. 16. 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.
Chesapeake’s $1 billion of 6.125 percent notes maturing in February 2021 traded at 90 cents on the dollar to yield 7.7 percent, down from 94 cents on May 11, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.
Credit-default swaps tied to the oil and natural gas producer, criticized for allowing its top executive to invest in the company’s wells, rose 116 basis points to 787 basis points, the highest level since 2009 and the biggest jump since Dec. 5, 2008, Bloomberg data show.
JPMorgan’s $2 billion of 4.625 percent notes due in May 2021 dropped by the most since March 1 and traded at 105.4 cents on the dollar to yield about 3.90 percent, compared with 107.3 cents on May 11, Trace data show. Swaps on the bank increased for a fourth day to 144.5 basis points, the highest level since Dec. 30, according to data provider CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market.
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