Credit Swaps in U.S. Rise as European Austerity Backlash Grows

A gauge of corporate credit risk increased for the third straight day as election results in Europe indicated a backlash against austerity measures.

The Markit CDX North America Investment Grade Index, a credit-default swaps benchmark that investors use to hedge against losses on corporate debt or to speculate on creditworthiness, added 1.2 basis points to a mid-price of 100.1 basis points at 5:39 p.m. in New York, according to prices compiled by Bloomberg. Contracts linked to Dish Network Corp. climbed the most in nearly a month as the second-largest U.S. satellite-television provider reported a 34 percent drop in profit.

The swaps index rose as France elected socialist leader Francois Hollande, who has called for a delayed deficit-reduction effort, and Greek voters picked anti-bailout parties. The results point to growing opposition to austerity measures imposed by European governments in response to the debt crisis.

“Uncertainty leads to a higher risk premium,” Mark Pibl, head of credit strategy at broker-dealer Cortview Capital Securities LLC, said in a telephone interview. “If Europe sneezes what will happen in the U.S.? Correlation across the credit markets is fairly high.”

Hollande used his campaign to call for increased spending, in contrast to austerity policies advanced by European leaders like German Chancellor Angela Merkel. Greek elections left the two biggest parties short of a clear majority to keep bailout efforts on track.


There will be a trade-off between deficit-cutting measures and growth through spending, according to Michael Kraft, senior portfolio manager at Vanderbilt Avenue Asset Management LLC. “There is a push and pull going on and it’s not clear which direction is going to win,” he said.

The credit swaps measure, which typically rises as investor confidence deteriorates and falls as it improves, breached the 100-basis point mark for the first time in almost two weeks.

The default swaps contracts 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.

The cost to protect against losses on Dish’s debt increased by 11.2 basis points to a mid-price of 305.8 basis points at 5:27 p.m., Bloomberg prices show. That’s the biggest rise since the contracts rose by 12.4 points on April 10. First-quarter net income fell to $360 million, the Englewood, Colorado-based Dish said today in a statement, compared to $549 million in the same period last year.

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