U.S. Credit Swaps Hold at 3-month Low as Retail Sales Increase

A gauge of U.S. company debt risk held at about a three-month low after data showed U.S. retail sales rose the most since February, while Germany’s economy grew more than estimated and France averted a contraction.

The Markit CDX North America Investment Grade Index, a credit-default swaps benchmark used to hedge against losses on corporate debt or to speculate on creditworthiness, increased 0.2 basis point to a mid-price of 102.9 basis points at 4:34 p.m. in New York, according to prices compiled by Bloomberg. Contracts tied to JPMorgan Chase & Co. (JPM) and Citigroup Inc. (C) fell to the lowest in more than three months.

Better-than-forecast economic conditions may ease investor concern that global financial weakness will pollute corporate balance sheets and hamper companies’ ability to meet debt obligations. U.S. retail sales climbed 0.8 percent in July, signaling consumer spending is improving even as unemployment remains more than 8 percent for a 42nd month.

The underlying economic data is pointing to a U.S. economy that isn’t “as bad as we once thought,” William Larkin, a fixed-income money manager who helps oversee $500 million at Cabot Money Management Inc. in Salem, Massachusetts, said in a telephone interview. The corporate bond market “is going to benefit from stronger or better economic data and also from a stronger economy because the default-rate assumptions fall.”

Economists had called for a 0.3 percent rise in retail sales, according to the median estimate in a Bloomberg News survey. July’s retail sales mark the first increase in four months.

European GDP

The euro-area economy contracted in the second quarter, slipping 0.2 percent, after stalling in the first three months of the year, the European Union’s statistics office in Luxembourg said today. In Germany, GDP rose 0.3 percent in the second quarter, beating the 0.2 percent gain called for by the median estimate of economists in a Bloomberg News survey. France’s economy stalled in the second quarter, avoiding the 0.1 percent decline forecast by economists.

European Central Bank President Mario Draghi is pushing a plan to tame soaring borrowing costs in Spain and Italy through sovereign debt purchases. The U.S. Federal Reserve Chairman Ben S. Bernanke has also said the central bank is ready to unleash new growth-boosting measures, including large-scale asset purchases, if the labor market fails to improve.

Data signaling improvement in the U.S. economy may dissuade the Fed from initiating more stimulus, a good thing for bond investors, according to Larkin.

Fed Lifelines

“It’s unlikely for them to act unless there’s an emergency because they don’t have a lot of lifelines left,” he said. “From the bond market, we like stability” and “don’t like the volatility. When the Fed starts to enact policies, that creates lots of volatility.”

Credit-default swaps tied to JPMorgan slipped 5 basis points to 114.2 basis points, the lowest since the contracts closed at 111.2 on May 10, at 4:42 p.m. in New York, Bloomberg prices show. The cost to guard against losses on the debt of Citigroup dropped 4.9 to 227.7, the lowest since the contracts closed at 222.5 basis points on May 3.

Credit swaps tied to the debt of MGIC Investment Corp. (MTG) dropped 2.1 percentage points to 34.8 percent upfront, according to data provider CMA, which is owned by McGraw-Hill Cos. and compiles prices quoted by dealers in the privately negotiated market.

MGIC Swaps

That’s in addition to 5 percent a year, meaning it would cost $3.48 million initially and $500,000 annually to protect $10 million of the company’s debt for five years. Credit-default swaps typically fall as investor confidence improves and rise as it deteriorates.

The default premium on the Markit CDX North America High Yield Index, a measure of U.S. speculative-grade corporate debt risk, was little changed at a mid-price of 553.9 basis points, Bloomberg prices show.

In London, the Markit iTraxx Europe Index of 125 companies with investment-grade ratings decreased 4.1 to 145.1, the lowest since May 7.

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: Brooke Sutherland in New York at bsutherland7@bloomberg.net

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

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