Credit-Default Swaps in U.S. Climb as Spanish Bond Yields Soar

A gauge of U.S. corporate debt risk rose for the first time in three days as Spanish bond yields climbed above 7 percent, dimming optimism that a pro-bailout victory in Greece will stave off the sovereign-debt crisis.

The Markit CDX North America Investment Grade Index, a credit-default swaps benchmark used to hedge against losses on corporate debt or to speculate on creditworthiness, increased 1.6 basis points to a mid-price of 119.4 basis points at 4:31 p.m. in New York, according to prices compiled by Bloomberg. The measure rose by as much as 4.4 basis points before paring gains. Contracts tied to Cable & Wireless Worldwide Plc declined by the most in almost two months.

Spanish 10-year bond yields climbed above 7 percent for the first time since the creation of the euro, jumping 28 basis points to 7.16 percent at 12:02 p.m. in New York. Concern that the region’s market turmoil is escalating deepened even as Greek election winner Antonis Samaras raced to build a coalition to keep aid money flowing.

Borrowing costs for Spain have surged “because the market doesn’t have confidence that Europe is on the right track” to solve the area’s credit dilemma, Sean Egan, president of Egan-Jones Ratings Co., said in a radio interview on “Bloomberg Surveillance” with Ken Prewitt and Tom Keene. “Spain is the next target in the minds of a lot of investors.”

Bad Loans

Loans that went unpaid as a proportion of total Spanish lending jumped to the highest level since 1994, suggesting the country’s recession is pushing more companies and consumers into default. Bad loans rose to 8.72 percent of total lending in April from 8.37 percent in March, according to data published today by the Bank of Spain in Madrid.

In Greece, the New Democracy and Pasok parties garnered enough votes to form a majority in the 300-member parliament as voters rejected anti-austerity platforms that would have disqualified the nation from international aid.

There is no immediate worry over New Democracy leader Samaras’s ability to forge a coalition government, Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott LLC in Philadelphia, which oversees $12 billion in fixed-income assets, said in a telephone interview. “There is a little bit of concern about a Humpty Dumpty coalition. The idea being that there are so many pile-ons that the whole thing falls apart.”

Fitch Ratings said today the pro-bailout party’s victory in Greece has removed the immediate risk of downgrades to other euro-region nations and the near-term danger of a disorderly Greek debt default and exit from the euro has decreased.

Liquidity Stress

Liquidity for U.S. speculative-grade companies remained healthy, even as Europe’s upheaval threatens the global economic recovery, according to a report by Moody’s Investors Service.

Moody’s Liquidity-Stress Index held May’s record low of 3.3 percent through the middle of June as rising earnings and improved access to capital markets buoy high-yield debt, analysts for the ratings company led by Tom Marshella said in a research note today. The index declines when liquidity positions improve.

The cost to guard against losses on the debt of London-based Cable & Wireless, the owner of Britain’s largest fiber system for businesses, decreased 97.9 basis points to a mid-price of 107.1 basis points at 4:01 p.m. in New York, Bloomberg prices show. That means investors pay 107,100 euros ($134,689) a year to protect 10 million euros of the company’s debt.

Takeover Bid

The telecommunication company’s largest shareholder, Orbis Holdings Ltd., today accepted a 1.04 billion-pound ($1.6 billion) takeover bid from Vodafone Group Plc that it had criticized earlier as undervaluing the target. Credit swaps tied to Cable & Wireless have declined for nine days, and today’s drop was the biggest since a slide of 175.4 basis points on April 23.

The swaps index typically climbs 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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