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Corporate Credit Risk Index Halts Decline After Payroll Drop

A gauge of corporate credit risk in the U.S. was little changed as speculation the Federal Reserve will buy more bonds to bolster the recovery failed to outweigh a report showing payrolls dropped.

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, was almost unchanged at a mid-price of 98.7 basis points, according to index administrator Markit Group Ltd. The measure typically climbs as investor confidence deteriorates and falls as it improves. Swaps on Halliburton Co. and Baker Hughes Inc. declined.

The index, which fell 6.33 basis points yesterday, the biggest drop since Sept. 21, halted its improvement as speculation that the Fed will act to revive the U.S. economy by purchasing assets signaled weakness in the recovery, according to Brian Yelvington of Knight Libertas LLC.

Quantitative easing shows “the outlook for the economy is bad and not improving,” Yelvington, head of the broker-dealer’s fixed-income strategy in Greenwich, Connecticut, wrote in a note today.

Employment at companies in the U.S. decreased by 39,000 last month, the biggest drop since January, after a revised 10,000 rise in August, according to figures from ADP Employer Services. The median estimate of 37 economists surveyed by Bloomberg News called for a 20,000 gain. Forecasts ranged from a decline of 44,000 to a 75,000 increase.

Liquidity Impact

Weak employment data serves “to illustrate why we should not view QE as an excuse to enter risk assets,” Yelvington wrote.

Fed Chairman Ben S. Bernanke and his colleagues have signaled they may announce the purchase of more Treasuries as soon as their next policy meeting on Nov. 2-3 in an effort to boost growth and reduce an unemployment rate stuck near 10 percent for the past year.

“The impact of this liquidity on the markets can be pretty substantial,” said Jason Quinn, co-head of high-grade and high-yield flow trading at Barclays Capital in New York, said in an interview. “People de-risked throughout May, June and July. As a result of that, we now have a lot of liquidity chasing a limited supply of risk assets.”

Credit swaps on Halliburton declined 8.2 basis points to 72.5, according to data provider CMA. Swaps on Baker Hughes Inc. fell 5.2 basis points to 57.8, CMA prices show.

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, 0.01 percentage point, equals $1,000 annually on a contract protecting $10 million of debt.

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