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Credit Swaps in U.S. Rise as Jobless Claims Higher Than Expected

A gauge of U.S. company credit risk rose for the first time in three days as jobless claims and manufacturing data fueled concern that the economy is slowing.

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 basis point to a mid-price of 115 basis points at 11:47 a.m. in New York, according to prices compiled by Bloomberg.

The swaps measure reversed earlier declines after a gauge of Philadelphia-area manufacturing fell at the fastest pace in almost a year while jobless claims were more than forecast, stoking concern that the global recovery is faltering. Spain sold 2.2 billion euros ($2.8 billion) of notes due in five years or less today, surpassing its 2 billion-euro target, pushing the gauge down in early-morning trading.

The benchmark had decreased in “anticipation of good news, given the rumors” of additional stimulus that emerged out of the Group of 20 leaders’ summit in Mexico, Mark Alexandridis, a portfolio manager at First Principles Capital Management LLC, said in a telephone interview.

“We’ve been disappointed by the political will in Europe for more than two years, however the market continues to be sanguine about their ability to stem the crisis,” Alexandridis said. “It remains to be seen whether or not they can come up with a credible package and a credible strategy.”

Jobless Claims

Yields on Spanish 10-year notes rose above 7 percent this week for the first time since the creation of the euro in 1999. Today’s sale follows an auction of 3.04 billion euros ($3.8 billion) of debt on Tuesday that also beat its target.

U.S. jobless claims decreased by 2,000 to 387,000 in the week ended June 16, Labor Department data showed today in Washington. Economists had forecast 383,000 Americans would seek benefits, according to the median of 45 estimates in a Bloomberg News survey. The Federal Reserve Bank of Philadelphia’s economic index also showed the worst contraction in manufacturing in almost a year.

The U.S. central bank decided yesterday to extend its program to lower borrowing costs by replacing short-term bonds with longer-term debt, known as Operation Twist. Fed Chairman Ben S. Bernanke signaled the bank may pursue additional stimulus measures if the labor market fails to improve.

“The consensus is that job growth is weak and these numbers don’t change that sentiment at all,” said Alexandridis, who oversees about $7.9 billion in fixed-income assets.

A preliminary report showed China’s factory output may shrink for an eighth month while manufacturing in the euro area contracted at the fastest pace in three years in June.

The swaps gauge 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.

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