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Credit Swaps in U.S. Jump as Growth Concern Rises on IMF, Retail

A gauge of U.S. corporate debt risk rose as the International Monetary Fund lowered its 2013 growth forecast and U.S. retail sales fell for a third month, signaling Europe’s debt crisis is undermining the global economy.

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 0.9 basis point to a mid-price of 112.7 basis points at 5:09 p.m. in New York, according to prices compiled by Bloomberg. Contracts tied to Lexmark International Inc. rose to a record after the company said Europe’s financial turmoil had crippled second-quarter sales.

Investors are concerned that the euro area’s fiscal strains are spreading, curbing global demand and damaging borrowers’ ability to repay debt. The IMF today cut its projections for global economic growth next year to 3.9 percent from the 4.1 percent estimate made in April as Spain’s recession extends and emerging markets’ expansion slows. A separate report showed U.S. retail sales slumped in June.

“Everybody knows by now that the source of the global slowdown is the euro side,” Andrew Wilkinson, chief economic strategist at Miller Tabak & Co. in New York, said in a telephone interview. “While the policy response is under way, I think what people don’t like about what the IMF says is the way that it is seeping into emerging markets more and more.”

U.S. retail sales dropped 0.5 percent last month, the third consecutive decline, after falling 0.2 percent in May, Commerce Department data showed today. Economists had called for a gain of 0.2 percent, according to the median estimate of a Bloomberg News survey.

GDP Weakening

“When people dug deeper into it, they decided that second-quarter GDP might actually weaken,” Wilkinson said of the retail sales data. “When the IMF report came out, maybe that was the straw that broke the camel’s back.”

The swaps gauge rose earlier after Germany’s top court’s decision to stay a ruling on the nation’s participation in the euro area’s bailout fund. The Federal Constitutional Court won’t decide whether to suspend the European Stability Mechanism and fiscal pact until Sept. 12, two months after holding a hearing on complaints that the measures undermine democratic rule.

Lexmark Sales

“Our managers have been focusing on credit research and adding to credit exposure, but they’ve taken a pause recently,” Brian Jacobsen, who helps oversee $204 billion as chief portfolio strategist at Wells Fargo Advantage Funds in Menomonee Falls, Wisconsin, wrote in an e-mail. “It’s the type of environment where I think you want to be comfortable with your research, reassess your assumptions and ride it out.”

Lexmark said last week that second-quarter sales probably fell about 12 percent, compared with the 7 percent to 9 percent drop the company had forecast in April, as Europe’s economic slump curtails demand. Profit in the period ended June 30 was 53 cents to 55 cents a share, down from projections of 65 cents to 75 cents, the Lexington, Kentucky-based maker of laser and inkjet printers said. Lexmark will report full second-quarter earnings results on July 24.

The cost to guard against losses on the debt of Lexmark climbed 59.5 basis points to a mid-price of 539.3 basis points, the highest in figures dating back to June 2008, Bloomberg prices show. Credit-default swaps tied to Lexmark have risen 152.1 basis points since July 11.

The swaps measure 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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