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Credit Swaps in U.S. Fall as Employment Data Fuel Stimulus Bets

A gauge of U.S. corporate credit risk dropped the most in a month as May employment data allayed concern that the Federal Reserve will taper stimulus efforts that have bolstered credit markets.

The Markit CDX North American Investment Grade Index, a credit-default swaps benchmark that investors use to hedge against losses or to speculate on creditworthiness, dropped 4.2 basis points to a mid-price of 79.7 basis points at 11:05 a.m. in New York, according to prices compiled by Bloomberg. That’s the biggest drop since May 3 on an intraday basis.

Fed policy makers are debating on when and how to dial back their unprecedented stimulus campaign, known as quantitative easing, based on the level of improvement in the U.S. economy. Payrolls grew by 175,000 workers last month after a revised 149,000 gain in April, Labor Department figures showed today in Washington. The unemployment rate rose to 7.6 percent from 7.5 percent.

“There is some level of optimism in the report, but it still supports the idea of very slow growth,” Zane Brown, fixed-income strategist at Lord Abbett & Co. in Jersey City, New Jersey, said in a telephone interview. “This gives us evidence of a continued, sub-par recovery that still needs support from an accommodative Fed.”

The credit-swaps index 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.

Pimco’s Gross

The risk premium on the Markit CDX North American High Yield Index dropped 17.1 basis points to 392.9 basis points, Bloomberg prices show.

Bill Gross, manager of the world’s biggest bond fund, said the Fed is unlikely to reduce its asset purchases after the unemployment rate climbed in May.

“I don’t think today’s report says anything about tapering at all with unemployment going higher and metrics in terms of the work week and wages being very” dire, Pacific Investment Management Co.’s founder Gross said in a radio interview on “Bloomberg Surveillance” with Tom Keene and Mike McKee. Fed Chairman Ben S. Bernanke “won’t taper. But I think ultimately in order to get a more normal economy, the Fed has got to move interest rates up to more normal levels.”

Jarden Convertibles

Jarden Corp. (JAH), the maker of Crock-Pot slow cookers and Mr. Coffee, sold $250 million of convertible securities in a private offering.

The company issued 1.5 percent notes that can be swapped for shares at $58.46 each by June 2019, according to data compiled by Bloomberg. The stock traded at $44.96 at 11:05 a.m. in New York after gaining 31 percent this year.

The proceeds will be used for general corporate purposes, Rye, New York-based Jarden said in a statement today. Initial purchasers have the option to buy up to an additional $50 million of the debt.

The securities are rated B1 by Moody’s Investors Service, the credit grader said in a statement yesterday, adding that the proceeds will probably be used to fund future acquisitions.

The cost to protect against a default by Rite Aid Corp. (RAD) dropped as U.S. drugstore chain said it has started refinancing $500 million of debt and forecast fiscal first-quarter earnings that topped analysts’ estimates.

Term Loan

Five-year credit swaps tied to Rite Aid debt declined 50 basis points to a mid-price of 358 basis points by 11:10 a.m., according to data provider CMA, which is owned by McGraw Hill Financial and compiles prices quoted by dealers in the privately negotiated market. That’s the biggest drop since April 11 on a closing basis.

Rite Aid will refinance its 7.5 percent notes due March 2017 with the proceeds of a new $500 million second-lien term loan, according to a statement today. The company may also use available cash and borrowings under its revolving credit line to pay down the debt.

The drugstore-chain also forecast earnings of as much as 9 cents a share for the quarter through May, five cents more than the average estimate from 5 analysts.

The average relative yield on speculative-grade, or junk-rated, debt tightened 5.2 basis points to 543.5 basis points, Bloomberg data show. High-yield, high-risk debt is rated below Baa3 by Moody’s and less than BBB- at Standard & Poor’s.

To contact the reporter on this story: Victoria Stilwell in New York at vstilwell1@bloomberg.net

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

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