The cost to protect U.S. corporate debt from losses rose to the highest level this week amid concern the economy is slowing. The perceived risk of Bank of America Corp. and Goldman Sachs Group Inc. grew.
The Markit CDX North America Investment Grade Index, which investors use to hedge against losses on company debt or to speculate on creditworthiness, increased 6.8 basis points to a mid-price of 116.4 basis points as of 5:04 p.m. in New York, according to Markit Group Ltd. That’s the highest since Aug. 11, 2010.
The gauge, which typically rises when investor confidence deteriorates and falls as it improves, is climbing after more Americans than forecast filed applications for unemployment benefits last week, signaling the labor market is struggling. The Federal Reserve Bank of Philadelphia’s general economic index plunged this month to the lowest since March 2009, raising the specter of a new recession two years into the recovery.
“That was not necessarily a red signal but definitely a bright yellow,” sign for the economy, said Mikhail Foux, a credit strategist at Citigroup Inc. in New York. “To me the market is just looking for direction, investors are extremely spooked,” he said.
The Philadelphia Fed index fell to minus 30.7; readings less than zero indicate contraction. Jobless claims rose by 9,000 to 408,000 in the week ended Aug. 13, Labor Department figures showed today in Washington. Economists surveyed by Bloomberg survey projected a rise in jobless claims to 400,000.
Investors are reacting to negative economic data as they look ahead to an announcement from Fed Chairman Ben S. Bernanke at a conference in Jackson Hole, Wyoming, on Aug. 26 that could signal another asset-buying program, Foux said. The Fed completed its second round of so-called quantitative easing, known as “QE2,” at the end of June.
“The market is effectively demanding QE3, but I don’t think the Fed has any political will to do that,” Foux said.
Credit-default swaps on Charlotte, North Carolina-based Bank of America jumped 36.1 basis points to 327.7 basis points, according to data provider CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market. Swaps on New York-based Goldman Sachs rose 20.3 basis points to 205.3 points.
Credit swaps pay the buyer face value if a borrower fails to meets its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt.