Corporate Credit Swaps in U.S. Fall as Jobless Claims Decrease

A gauge of U.S. corporate credit risk dropped as first-time jobless claims fell and confidence among consumers remained at the highest since 2007.

The Markit CDX North America Investment Grade Index, a credit-default swaps benchmark that investors use to hedge against losses or to speculate on creditworthiness, declined 0.9 basis point to a mid-price of 100.5 basis points at 4:17 p.m. in New York, according to prices compiled by Bloomberg.

Improving economic data may allay investor concern that the recovery will weaken, hindering companies’ ability to repay debt obligations. Applications for unemployment benefits in the U.S. declined by 41,000 to 410,000 in the week ended Nov. 17 as damage to the jobs market caused by Hurricane Sandy began to subside, the Labor Department said today in Washington. The Thomson Reuters/University of Michigan final index of consumer sentiment was little changed at a five-year high in November.

Investors are paying attention to the domestic economy and “the big focus is on the fiscal cliff,” Robert Grimm, head of high-yield trading at Odeon Capital Group LLC in Greenwich, Connecticut, said in a telephone interview. While lawmakers “may come up with something that’s a short term fix,” he said, they need to clarify “what the long-term outlook is, what the taxes are going to be.”

Greece Deadlock

The swaps index fell the most in a year earlier this week after President Barack Obama expressed confidence he will reach a budget agreement with Congress to avoid $607 billion in spending cuts and tax increases set to take effect in 2013.

In Europe, ministers failed to agree on a debt-reduction package for Greece. With creditors led by Germany refusing to put up fresh money or offer debt relief, finance chiefs were unable to scrape together enough funds from other sources to help alleviate Greece’s debt burden, set to reach 190 percent of gross domestic product in 2014.

The credit-swaps measure typically falls as investor confidence improves and rises as it deteriorates. 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.

MBIA Swaps

Contracts tied to MBIA Insurance Corp. were the most actively traded U.S. company swaps by gross notional value for the period ended Nov. 16, according to the Depository Trust & Clearing Corp., which runs a central credit-swaps repository.

Moody’s Investors Service downgraded MBIA Insurance Corp. two levels to Caa2 on Nov. 19. Bank of America Corp. is seeking to buy the majority of a $329.1 million issue of parent company MBIA Inc. (MBI)’s bonds to block the company’s efforts to distance itself from the cash-strapped insurance unit.

The total gross notional value of all single-name contracts rose 2.4 percent to $123.6 billion last week, according to the New York-based DTCC.

Credit-default swaps tied to MBIA Inc. dropped 5.1 percentage points to 19.7 percent upfront at 3:30 p.m. in New York, according to data provider CMA, which is owned by McGraw- Hill Cos. and compiles prices quoted by dealers in the privately negotiated market. That’s in addition to 5 percent a year, meaning it would cost $1.97 million initially and $500,000 annually to protect $10 million of the company’s debt.

High Yield

The risk premium on the Markit CDX North America High Yield Index dropped 3.3 basis points to 519.5 basis points, Bloomberg prices show. The measure of U.S. speculative-grade corporate debt risk reached a 15-week high on Nov. 15.

The average relative yield on junk-rated debt declined 2 basis points to 5.91 percentage points, led by spreads on the bonds of industrial companies, which narrowed 6 basis points to 6.11 percentage points. A basis point is 0.01 percentage point.

The number of companies with the most potential for a ratings promotion to investment-grade stands at 23 issuers, accounting for $185.6 billion in rated debt, according to a report today from Standard & Poor’s.

To contact the reporter on this story: Peter Rawlings in New York at prawlings@bloomberg.net

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

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