Credit Risk Indexes Fall as Bets on Sovereign Crisis Are Pared

The cost of protecting against losses on corporate bonds fell as investors pared bets that Europe’s sovereign debt crisis will slow the global economy.

Credit-default swaps on the Markit CDX North America Investment Grade Index, which investors use to hedge against losses on corporate debt or to speculate on creditworthiness, fell 1.3 basis points to a mid-price of 121.8 basis points as of 2:50 p.m. in New York, according to Markit Group Ltd. Swaps on banks including Goldman Sachs Group Inc. and Morgan Stanley declined. In London, the Markit iTraxx Europe index of 125 companies with investment-grade ratings dropped 4.5 basis points to 123.75, Markit prices show.

Investor confidence was boosted as the Organization for Economic Cooperation and Development raised its global growth forecasts for this year and next and data showed that new home purchases in the U.S. jumped last month to a two-year high. Bank of America Corp. strategists yesterday recommended clients sell protection on the Markit CDX index, saying central bank efforts to ease strains in money markets may calm bank liquidity concerns.

“Unlimited printing of dollars can readily solve the liquidity concerns,” Bank of America Merrill Lynch strategists led by Jeffrey Rosenberg wrote in a note to clients yesterday. The strategists cautioned that the long-term government solvency concerns may persist.

The Markit CDX index yesterday jumped to as high as 134.5 basis points amid concerns Europe’s government debt strains and tension in the Korean peninsula would derail the global recovery. It reversed in late trading yesterday as stocks erased losses. The index typically rises as investor confidence deteriorates and declines as it improves.

Economic Growth

The Markit iTraxx Crossover Index of credit-default swaps on 50 European companies with mostly high-yield ratings decreased 18 basis points to 606.25, Markit prices show.

“A lot of it is probably short covering,” said Nick Burns, a credit strategist at Deutsche Bank AG in London.

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.

The economy of the OECD’s 30 members will grow 2.7 percent this year, more than the 1.9 percent predicted in November, the Paris-based group said today in a report. Including non-members such as China, the global economy will expand 4.6 percent this year and 4.5 percent in 2011, compared with an average of 3.7 percent during the decade through 2006.

Euro Weakens

In the U.S., new-home sales increased 15 percent to an annual pace of 504,000 last month, the highest level since May 2008, the Commerce Department said today in Washington. Orders for durable goods climbed the most in three months, rising 2.9 percent, it said.

Nouriel Roubini, the New York University professor who predicted the global financial crisis, said markets aren’t convinced Greece will control a deficit that has undermined confidence in the euro. There also are concerns Spain and Portugal lack the political will to cut spending, Roubini said.

The euro weakened to $1.2193 at 2:50 p.m. in New York, from $1.2345 yesterday. It touched $1.2144 on May 19, the lowest since April 2006.

Swaps on Goldman Sachs, the bank facing fraud allegations by the U.S. Securities and Exchange Commission, dropped 20 basis points to 180 basis points, according to broker Phoenix Partners Group. Contracts on Morgan Stanley fell 22 basis points to 238 basis points.

The Markit iTraxx Financial Index of 25 banks and insurers was unchanged at 170 basis points, JPMorgan Chase & Co. prices show.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE