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Default Swaps in U.S. Decline as European Leaders Meet on Crisis

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Jan. 23 (Bloomberg) -- A benchmark gauge of U.S. company credit risk fell for a fifth day in the longest stretch of decreases in more than a month on optimism European officials may craft a long-term plan to contain the region’s debt crisis.

The Markit CDX North America Investment Grade Index of credit-default swaps, which investors use to hedge against losses on corporate debt or to speculate on creditworthiness, slid 3.4 basis points to a mid-price of 102.7 basis points at 5:17 p.m. in New York, according to Markit Group Ltd. Contracts tied to the debt of Ally Financial Inc. and Caesars Entertainment Corp. also fell.

The gauge dropped to a five-month low as Germany and France said talks between Greece and bondholders were making progress, while a government official in Berlin said Germany may be open to combining Europe’s two bailout mechanisms and boosting their funding limit. Finance ministers meeting in Brussels today agreed on all aspects of the European Stability Mechanism in a deal to be signed on Jan. 30, Martti Salmi, an aide at Finland’s Finance Ministry in Helsinki, said by telephone.

“Market sentiment is positive right now, but given all the unknowns and all the uncertainties down the line, I’m a little concerned about the extent of this rally,” Mikhail Foux, a credit strategist at Citigroup Inc. in New York, said in a telephone interview.

The index, which typically falls as investor confidence improves and rises as it deteriorates, touched the lowest level since Aug. 5.

Ally Swaps Decline

Swaps tied to Ally declined 48.5 basis points to 508.3, according to data provider CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market. 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.

Contracts on Caesars eased 1.9 percentage points to 44 percent upfront, the data show. That’s in addition to 5 percent a year, meaning it would cost $4.4 million initially and $500,000 annually to protect $10 million of Caesar’s debt.

The U.S. two-year interest-rate swap spread, a measure of stress in credit markets, narrowed 0.53 basis point to 34.67 basis points. The measure falls when investors favor assets such as corporate bonds and rises when they seek the perceived safety of government securities.

To contact the reporter on this story: Mary Childs in New York at mchilds5@bloomberg.net

To contact the editor responsible for this story: Alan Goldstein at agoldstein5@bloomberg.net

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