Credit Swaps in U.S. Drop to 7-Month Low on Manufacturing Data

A benchmark gauge of U.S. company credit risk fell to the lowest level in more than seven months as data showed global manufacturing is weathering the European sovereign-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, decreased 1.3 basis points to a mid-price of 92.7 basis points at 5:12 p.m. in New York, according to Markit Group Ltd. That’s the lowest level since July 22.

The gauge slid as China’s purchasing managers’ index rose in February for a third month and U.S. initial jobless claims declined 2,000 to 351,000 last week, stoking optimism that the pace of global economic growth will bolster corporate balance sheets.

The European Central Bank’s record allotment of cheap three-year crisis loans to 800 banks under its longer-term refinancing operation yesterday has helped boost confidence in euro-region and U.S. banks, according to a note yesterday from Bank of America Corp. credit strategists led by Hans Mikkelsen. That, along with “continued decent U.S. economic data,” and a lack of announcements about further easing from the Federal Reserve yesterday are “good for credit,” they wrote.

The swaps index typically falls as investor confidence improves and rises as it deteriorates. 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.

Gap’s Swaps Fall

Credit-default swaps on Gap Inc. declined for a sixth day, after sales at the largest U.S. apparel chain climbed 4 percent, beating the average projection for a 1.4 percent drop from analysts surveyed by Retail Metrics Inc.

The contracts fell 23.8 basis points to 209.5 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.

The European Central Bank’s exchange of Greek bonds for new securities exempt from losses being imposed on private investors hasn’t triggered $3.25 billion of outstanding contracts, the International Swaps & Derivatives Association said after it was asked to rule on whether part of the nation’s 130 billion-euro ($173 billion) bailout was a credit event.

ISDA Greece Ruling

The ruling, by ISDA’s determinations committee, including JPMorgan Chase & Co. and Pacific Investment Management Co., was given on its website. The switch didn’t constitute subordination, one of the criteria for a payout under a restructuring event, the group said.

“The situation in the Hellenic Republic is still evolving,” and today’s decisions “do not affect the right or ability to submit further questions,” ISDA said in a statement.

A swaps payout may still happen if Greece uses collective action clauses on private investors who refuse to take so-called haircuts on their debt holdings, according to ISDA’s rules. Officials including former ECB President Jean-Claude Trichet have opposed triggering swaps because they’re concerned traders would be encouraged to bet against failing nations and worsen Europe’s fiscal turmoil.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE