Credit Swaps in U.S. Jump Most This Month Before Europe Summit

A benchmark gauge of U.S. corporate debt risk rose by the most this month as euro-area leaders prepare to debate stimulus measures in a two-day summit this week that may decide the future of the currency bloc.

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 4.3 basis points to a mid-price of 119.7 basis points at 5:43 p.m. in New York, according to prices compiled by Bloomberg. Contracts tied to Hershey Co. climbed after the chocolate maker said it may pursue as much as $30 billion of acquisition opportunities.

Investors are concerned that Europe’s debt crisis may contaminate corporate balance sheets worldwide. European Union leaders are set to consider further integration measures in the currency bloc during a June 28-29 summit in Brussels as they strive to hold down rising bond yields. French President Francois Hollande and Italian Prime Minister Mario Monti have voiced support for joint euro-area debt issuance, while German Chancellor Angela Merkel has signaled rejection of the idea.

“It’s a possibility that this could be the start of the unraveling,” Robert Grimm, a trader at broker-dealer Odeon Capital Group LLC in Greenwich, Connecticut, said of the gathering of European leaders. “The less they come up with, the more skeptical people will be that they can actually hold it together.”

Euro Skepticism

The gauge rose even as Commerce Department data showed Americans bought more new homes than forecast in May. Purchases rose 7.6 percent from April to an annual rate of 369,000, the most since April 2010. Economists had forecast a pace of 347,000, according to the median of 67 estimates in a Bloomberg News survey.

“It’s really not a dynamic number,” said Grimm in a telephone interview. “New houses are 10-15 percent of the overall market so you have a small uptick in a small portion of the housing market. It’s not going to overshadow what’s going on around the rest of the world.”

The turmoil in Europe and signs of a contracting global economy led Jan Loeys, chief market strategist in New York at JPMorgan Chase & Co., to recommend investing in investment-grade bonds.

“You need to get out of equities; you need to be in the fixed-income world,” Loeys said today in an interview with Stephanie Ruhle and Adam Johnson on Bloomberg Television’s “Lunch Money.” “High-grade credit overall is the best place to be at the moment.”

Default Rate

The trailing 12-month U.S. default rate on high-yield bonds rose to 2.2 percent in May, passing 2 percent for the first time since October 2010, according to a report today from Fitch Ratings. Defaults in May affected a combined $3.9 billion of bonds.

“The funding environment for the weakest companies in the high-yield universe remains challenging,” wrote Fitch analysts led by Mariarosa Verde in the report. “Market access began to sour in the summer of 2011, following escalation of the European debt crisis, disappointing U.S. housing and labor market data, and disruptions caused by the U.S. debt ceiling debate. Since then, defaults have been heavily concentrated at the ’CCC’ level.”

High-yield bonds are rated below Baa3 by Moody’s Investors Service and lower than BBB- by Standard & Poor’s and Fitch. CCC ratings have “high default risk”, according to Fitch.

Hershey Swaps

Hershey Chief Executive Officer John P. Bilbrey said today during an investor meeting in New York that the candy maker will prioritize acquisitions to expand market share. The company is considering opportunities in China and India, while Chief Growth Officer Michele Buck said total acquisition possibilities amount to as much as $30 billion.

The cost to guard against losses on the debt of the Hershey, Pennsylvania-based company increased 2.7 basis points to a mid-price of 52.4 basis points at 5:02 p.m. in New York, Bloomberg prices show.

The swaps gauge, which climbed by the most since May 30 when it jumped 5.6 basis points, 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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