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Default Swaps in U.S. Climb as European Economy Curbs Earnings

April 18 (Bloomberg) -- A benchmark gauge of U.S. company credit risk increased for the first time in three days as a weak European economy constrained corporate earnings.

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, rose 0.9 basis point to a mid-price of 99.4 basis points at 4:49 p.m. in New York, according to Markit Group Ltd. Contracts tied to Genworth Financial Inc., the life insurer and mortgage guarantor, climbed the most in almost nine months.

Intel Corp. and International Business Machines Corp. reported that a European slump weighed on sales growth, increasing concern that a possible recession in Europe may weigh on U.S. corporate balance sheets. Surging bad loans in Spain are spurring investors’ doubts whether the government can clean up the country’s banks without damaging public finances more.

“If earnings are weak and there are problems in Europe, it is going to drive out the spreads,” Marc Gross, a money manager at New York-based RS Investments, said in a telephone interview. “The perceived market risk is higher because of the worsening situation in Europe.”

Non-performing loans in Spain as a proportion of total lending jumped to 8.16 percent in February, the highest level since 1994, from less than 1 percent in 2007, according to Bank of Spain data published today.

Spain Bailout Concern

“Everyone knows Spain has problems,” Gross said. “It just puts them one step closer to needing a financial bailout. And that is a huge concern because Spain is a much larger country than Greece.”

The default-swaps gauge, which typically rises as investor confidence deteriorates and falls as it improves, fell to as low as 84.7 basis points in March from a high of 120 basis points at the start of the year.

“Underwhelming payroll numbers on April 6th followed by renewed concerns about Spain have given investors ample reason for pause,” Marc Pinto, head of corporate bond strategy at New York-based Susquehanna International Group, wrote in an e-mail.

The 120,000 rise in U.S. nonfarm payrolls for March was the smallest increase in five months, the Labor Department reported on April 6.

The cost to protect Genworth debt from default for five years surged to the highest level since Jan. 18, jumping 114 basis points to 629 basis points as of 4:30 p.m. in New York, according to data provider CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market. That’s the biggest single-day increase since July 21, the data show.

Offering Postponed

The insurer postponed plans for a public offering of its Australian unit backing home loans after “elevated” losses in the nation. The insurer is selling assets to build capital that it lost insuring soured mortgages in the U.S. and guaranteeing retirement income in market slumps.

Genworth is rated Baa3 by Moody’s Investors Service and one step higher at BBB by Standard & Poor’s. Both ratings firms have a negative outlook on the Richmond, Virginia-based company. That reflects the “continuing uncertainty and downside risk” from the U.S. mortgage operations over the next few years, Pinto said.

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.

To contact the reporter on this story: Sridhar Natarajan in New York at snatarajan15@bloomberg.net

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

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