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Global Credit Risk Climbs Amid U.S. Housing Slowdown Concerns

Global gauges of corporate credit risk rose as a bigger-than-forecast drop in U.S. home sales stoked concern the economic recovery is faltering.

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, rose 3.7 basis points to a mid-price of 113.1 basis points as of 5:16 p.m. in New York, the highest since July 8, according to Markit Group Ltd. A benchmark credit swaps index tied to European banks and insurers rose the most since Aug. 20.

Swaps on Toll Brothers Inc. jumped to the highest since December 2008 as a report today showed sales of existing homes in the U.S. dropped 27.2 percent in July, twice as much as forecast, as foreclosures and limited job growth stifle the housing market. Europe is at risk of sliding back into a recession as governments cut spending to reduce budget deficits, Nobel Prize-winning economist Joseph Stiglitz said today.

“High excess supply, high unemployment and rising delinquencies all make for an explosive mix, powerful enough to tip the U.S. economy back into recession,” said Christian Weber, a Munich-based credit strategist at UniCredit SpA. The conditions could create a “negative feedback loop,” he said.

Purchases of existing homes, which make up about 90 percent of the U.S. housing market, plunged to a 3.83 million annual rate, figures from the National Association of Realtors showed today in Washington. That compares with the median forecast of a 4.65 million pace, according to a Bloomberg News survey. U.S. stocks dropped, and the 10-year Treasury yield fell below 2.5 percent for the first time since 2009.

KB Home Swaps

Swaps on Toll Brothers, the largest U.S. luxury-home builder, rose 13.7 basis points to 233.5 basis points, the highest since December 2008, according to data provider CMA. Swaps on Bank of America Corp.’s Merrill Lynch unit jumped to the highest in almost eight weeks. Contracts on KB Home, the U.S. homebuilder that targets first-time buyers, rose the most in two months.

Merrill Lynch swaps climbed 10.9 basis points to 192.8 basis points, CMA prices show. Contracts on San Francisco-based Wells Fargo & Co. rose 6.7 to 109.2. Contracts on KB Home increased 32.9 basis points to 565.5 basis points, according to CMA.

In London, the Markit iTraxx Financial Index of credit-default swaps on 25 banks and insurers rose 5.5 basis points to 140.5, the highest level since July 20, according to JPMorgan Chase & Co.

Governments in the euro area pledged to cut deficits to below the European Union limit of 3 percent of gross domestic product after the Greek crisis earlier this year eroded confidence in the 16-member currency union. While the economy expanded at the fastest pace in four years in the second quarter, the recovery is showing signs of weakening.

Double-Dip Risk

Growth in the region’s services and manufacturing industries slowed more than economists forecast in August and German investor confidence slumped to the lowest in 16 months. Moody’s Investors Service said yesterday that “risks to economic growth are clearly to the downside.”

“Cutting back willy-nilly on high-return investments just to make the picture of the deficit look better is really foolish,” Stiglitz told Dublin-based RTE Radio. “Because so many in Europe are focusing on the 3 percent artificial number, which has no reality and is just looking at one side of a balance sheet, Europe is at risk of going into a double-dip.”

A basis point on a credit-default swap protecting $10 million of debt from default for five years is equivalent to $1,000 a year.

Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a company fail to adhere to its debt agreements. An increase signals deterioration in perceptions of credit quality.

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