Credit Swaps in U.S. Drop to New 3-Month Low on Economic Data

A gauge of U.S. company debt risk declined to a three-month low after data showed an index of leading economic indicators rose more than forecast and consumer confidence unexpectedly climbed.

The Markit CDX North America Investment Grade Index, a credit-default swaps benchmark used to hedge against losses on company debt or to speculate on creditworthiness, decreased 1.5 basis points to a mid-price of 99.7 basis points at 4:23 p.m. in New York, according to prices compiled by Bloomberg. That’s the lowest since the measure closed at 98.8 basis points on May 4.

Signs of improvement in an economy where the unemployment rate has been more than 8 percent for 42 months may ease investor concern that a global slowdown will taint corporate balance sheets and undermine companies’ ability to repay debt. The Conference Board’s gauge of the outlook for the next three to six months rose 0.4 percent in July, while a separate report showed consumer confidence rose to the highest level since May.

“The end-all, be-all is that we’re not in this alone, and we really have to be very cognizant of what’s going on away from us,” Robert Grimm, a trader at broker-dealer Odeon Capital Group LLC in Greenwich, Connecticut, said in a telephone interview. “We know Europe is in a recession,” he said. “If they can do more things that will stimulate their economies then I think ours will continue to do better.”

Consumer Sentiment

Economists had called for a 0.2 percent increase on the index of the leading economic indicators, according to the median estimate in a Bloomberg News survey. The Thomson Reuters/University of Michigan preliminary August index of consumer sentiment increased to 73.6 from 72.3 in July.

Data earlier this week showed retail sales rose for the first time in four months and building permits, a proxy for future construction, rose to the highest since August 2008.

In London, the Markit iTraxx Europe Index of 125 companies with investment-grade ratings decreased 0.7 basis point to a mid-price of 144.5 basis points, Bloomberg prices show.

German Chancellor Angela Merkel is considering easing the terms of Greece’s bailout, according to lawmakers Klaus-Peter Willsch and Frank Schaeffler. Greece’s international creditors are scheduled to report on the nation’s progress in meeting bailout targets next month.

‘Major Disappointment’

“There’s really a building momentum that Europe is actually going to have something extremely positive to say toward this whole mess,” Grimm said. “My gut would be that we’re building ourselves up for a major disappointment. There is no way that Greece can pay off the debt that they have.”

The default premium on the Markit CDX North America High Yield Index, a measure of U.S. speculative-grade corporate debt risk, fell 6 basis points to a mid-price of 540.6 basis points, Bloomberg prices show.

The number of global corporate defaults this year rose to 52 after Standard & Poor’s gave Swedish-based bus operator Nobina AB a selective default rating, the New York-based firm said today in a statement. Twenty-eight of those defaults were based in the U.S.

Credit-default swaps typically fall as investor confidence improves and rise as it deteriorates. 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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