Default Swaps in U.S. Rise as Factory Orders Unexpectedly Slip

A gauge of corporate credit risk rose as factory orders in the U.S. declined in April for a second month, pointing to signs of a slowing economy.

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 basis point to a mid-price of 127.5 basis points at 4:54 p.m. in New York, according to prices compiled by Bloomberg. Contracts linked to Lexmark International Inc. also increased.

The swaps measure increased as factory bookings fell 0.6 percent after a revised 2.1 percent decrease in March, the first back-to-back declines in more than three years, figures from the Commerce Department showed today in Washington. The data follows reports from last week that showed hiring slowed and that the unemployment rate climbed to 8.2 percent, as the economic recovery loses steam.

“Investors think they need to pull back a little bit when they see the domestic economy start to slow down,” said Matthew Duch, a fixed-income money manager at Calvert Investments, which oversees more than $12 billion in assets. “There’s not a strong desire to take risk off, as much as not put risk on.”

Growth Forecast

Moody’s Investors Service’s Liquidity-Stress Index fell to a low of 3.3 percent in May from 3.9 percent in April, the ratings company said today in a statement. The gauge measures the percentage of speculative-grade borrowers with the lowest liquidity rating. JPMorgan Chase & Co. cut its U.S. economy growth forecast to 2.2 percent for the year from 2.4 percent.

“Company fundamentals are still very strong,” Duch said. “But companies just don’t see the opportunity for growth in a meaningful way in the near term.”

The cost to protect against losses on the debt of Lexmark rose to the highest level in more than three years as the maker of laser and inkjet printers for businesses struggles to sell its equipment.

Credit-default swaps on the Lexington, Kentucky-based company increased by 15.2 basis points to a mid-price of 340.6 basis points at 4:33 p.m., Bloomberg prices show. That’s the most since it closed at 356.4 basis points on April 15, 2009.

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

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