Credit Swaps in U.S. Climb on German, U.S. Unemployment Concern

A gauge of U.S. company credit risk rose as U.S. jobless claims held at almost the highest level this year and as German unemployment put pressure on European Union leaders meeting today to curb the currency bloc’s financial 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 0.6 basis point to a mid-price of 118.3 basis points at 5:04 p.m. in New York, according to prices compiled by Bloomberg. Contracts tied to Cigna Corp. and UnitedHealth Group Inc. climbed after the U.S. Supreme Court upheld the core of President Barack Obama’s health-care overhaul.

The number of applications for unemployment benefits in the U.S. lingered at about the most of 2012, while German unemployment rose for the fourth month this year. Investors are concerned that mounting economic strains in Europe may detract from U.S. corporate creditworthiness.

“The employment numbers today were small potatoes compared to what the outcome of the summit will be,” Brian Reynolds, chief market strategist for Rosenblatt Securities Inc. in New York, said in a telephone interview. “Everyone is waiting to see what is happening with the EU.”

U.S. jobless claims fell by 6,000 in the week ended June 23 to 386,000, down from a revised 392,000 for the prior week that was the highest figure for 2012, Labor Department data showed today in Washington. In Germany, 2.88 million people were without jobs, an increase of 7,000 on a seasonally adjusted basis for the fourth monthly increase this year, the Nuremberg-based Federal Labor Agency said today.

European Summit

European Union leaders began a two-day summit today in Brussels, their 19th such meeting since the debt crisis began more than two years ago. German Chancellor Angela Merkel said yesterday that the joint debt sales advocated by French President Francois Hollande, Italian Prime Minister Mario Monti and Spanish Prime Minister Mariano Rajoy as a means to lower borrowing costs are the “wrong way” to achieve the greater European integration needed to stem the turmoil.

“It looks like there’s not going to be any more of a breakthrough than some general agreement on a banking framework,” Reynolds said. “The market is looking for more than that and so it will likely be disappointed.”

Spain Yields

Spain’s 10-year bond yield breached 7 percent for the first time since June 20 before paring its rise, while the yield on Italy’s 10-year notes slipped 1 basis point to 6.2 percent as the nation sold 5.42 billion euros ($6.7 billion) of five- and 10-year notes today, just short of a 5.5 billion-euro target.

The cost to guard against losses on the debt of Cigna and UnitedHealth climbed after Supreme Court justices voted 5-4 to approve a health-care plan that would require Americans to carry insurance or pay a penalty. Contracts tied to UnitedHealth, the biggest U.S. health insurer by sales, increased 4.5 basis points to a mid-price of 111.3 basis points, according to data provider CMA. Credit swaps on Cigna rose 7.5 to 100.

Credit swaps typically rise as investor confidence deteriorates and falls as it improves. The 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.

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