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Credit Swaps Decline to Six-Month Low After U.S. Jobs Report

The cost of protecting bonds from default in the U.S. fell every day this week, dropping to the lowest in more than six months, after payrolls rose more than forecast, bolstering optimism the labor market is recovering.

The Markit CDX North America Investment Grade Index, which investors use to hedge against losses on corporate debt or to speculate on creditworthiness, fell 0.9 basis points to a mid- price of 85.4 basis points, according to index administrator Markit Group Ltd.

“Payrolls really surprised on the upside -- I’d expect on a normal day we’d be substantially tighter,” said Mikhail Foux, a credit strategist at New York-based Citigroup Inc. “That tells us in my opinion that people are a little tired.”

The index has lost 9 basis points this week, the biggest slide since July, after the Nov. 2 elections resulted in a divided Congress and the Fed said it will buy $600 billion of Treasuries to bolster the economy. Swaps on New York-based Goldman Sachs Group Inc., the most profitable securities firm in Wall Street history, fell 18.9 basis points over the five-day period.

Payrolls climbed 151,000, exceeding the median estimate of economists surveyed by Bloomberg News, Labor Department figures showed today. Private payrolls that exclude government agencies also gained more than forecast, while the jobless rate held at 9.6 percent.

Less of a Worry

Credit-default swaps on Morgan Stanley, based in New York, dropped 15.2 basis points this week, CMA data show. Contracts on Wells Fargo & Co., based in San Francisco, slid 15.1 basis points, according to CMA.

The swaps on the banks had jumped amid the controversy over whether the mortgage industry has taken improper shortcuts to speed up foreclosures and on demands from bond investors that lenders repurchase faulty securitized loans.

Banks don’t suffer from constrained liquidity right now, said Ricardo Kleinbaum, a credit analyst at BNP Paribas SA in New York. “Secondly, this whole mortgage repurchase issue, and this is true for all financials, could be less of a credit worry than some people anticipate.”

Banks have benefited as the Fed has implemented quantitative easing and as investors have reevaluated the impact of mortgage-foreclosure put-backs, according to Kleinbaum and Foux.

Fed Guidelines

Other factors pushing bank swaps lower are the news that the Federal Reserve is preparing guidelines to assess whether banks are strong enough to boost dividends or buy back shares, and Representative Spencer Bachus’s Nov. 3 comment letter saying the so-called Volcker rule barring bank holding companies from trading on their own accounts will hurt U.S. competitiveness and cut profits at the largest such companies, Foux said. Bachus, an Alabama Republican, may become the next chairman of the Financial Services Committee.

The Markit index, which typically falls as investor confidence improves, rose earlier as the cost of insuring sovereign debt surged to a record. Austerity measures in Europe’s so-called peripheral countries are failing to reassure investors that fiscal crises are under control.

Four U.S. issuers defaulted this week, bringing the U.S. total to 50 and global count to 73, according to a report by Standard & Poor’s dated today.

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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