Default Swaps in U.S. Fall as EU Leaders Meet on Crisis
A gauge of corporate credit risk in the U.S. declined as European leaders met in Brussels to discuss ways to stem the region’s debt crisis.
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, declined 0.1 basis point to a mid-price of 118.3 basis points at 5:44 p.m. in New York, according to prices compiled by Bloomberg. Contracts linked to General Motors Co. (GM) declined yesterday as the company may get a ratings upgrade within a year, according to Moody’s Investors Service.
The gauge fell from a high of 122.7 basis points following speculation that German Chancellor Angela Merkel may agree to a measure to support banks.
“There were rumors in the market that Merkel had verbally agreed to a pan-European bank deposit guarantee,” said Mark Alexandridis, a portfolio manager at First Principles Capital Management, overseeing about $7.9 billion in fixed-income assets. “The market has deteriorated into a one-dimensional place focused on any bit of news coming out of Europe.”
The index, which had increased by as much as 4.3 basis points, slipped later in the day based on the unconfirmed speculation, according to Alexandridis.
The credit swaps gauge has widened by more than 25 basis points this month as speculation mounts that Greece will leave the region’s common currency.
“The continual worry seems to be about headlines over Greece and the implications it may have for the rest of the financial system,” Susanna Gibbons, a portfolio manager at RBC Global Asset Management, which oversees more than $250 billion in assets, said in a telephone interview. “The worry is over a messy exit from the euro and how that would impact the banking system.”
The swaps gauge typically rises as investor confidence deteriorates and falls as it improves. 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.
Credit swaps linked to GM fell by the most since October as the automaker awaits a move to investment grade. Contracts on Detroit-based GM fell 38 basis points to a mid-price of 361 basis points yesterday, according to CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market. The swaps rose 10 basis points today.
“GM’s credit quality continues to improve and the company remains on track to regain an investment grade credit rating over the course of the next 12 months,” Moody’s analyst Bruce Clark said in a May 22 statement.
The firm, which rates GM at Ba1, raised its ratings on Ford Motor Co. (F) to high grade yesterday. The move will lift the company out of junk bond indexes as two of the three biggest ratings companies have now lifted its rating to investment grade.
Ford’s $1.8 billion of 7.45 percent notes maturing in July 2031 rose 2.5 cents to 130.5 cents on the dollar at 2:43 p.m. in New York, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. It was the most actively traded non-financial bond, Trace data show.
“The ratings upgrade is yet another milestone in the Ford story, affirming the overhaul through which the auto industry as a whole has gone during the past several years,” Jody Lurie, an analyst at Janney Montgomery Scott LLC said in a research note.
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