Credit Swaps in U.S. Rise as Policy Makers Seek Crisis Solution

A gauge of U.S. company debt risk rose for the first time in four days on concern that European Central Bank President Mario Draghi may fail to deliver on a pledge to protect the euro and lower sovereign borrowing costs.

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 1.2 basis points to a mid-price of 106.3 basis points as of 4:54 p.m. in New York, according to prices compiled by Bloomberg. The measure rose from the lowest level since May 10.

Investors are looking to European policy makers to control rising borrowing costs in Spain and Italy to halt financial turmoil that may jeopardize global balance sheets. Draghi, who said last week he would do whatever it takes to protect the euro, meets with U.S. Treasury Secretary Timothy Geithner in Frankfurt today and is attempting to sell the idea of ECB-backed government bond purchases to Bundesbank President Jens Weidmann.

“There are concerns as to whether everything Draghi said is going to actually come to fruition,” Robert Grimm, a trader at broker-dealer Odeon Capital Group LLC in Greenwich, Connecticut, said in a telephone interview. “Statements out of Germany seem to be pointing toward the fact that they’re really not 100 percent in Draghi’s court.”

Draghi’s Plan

Under Draghi’s proposal, Europe’s rescue fund would buy government bonds in the primary market while the ECB purchases debt in the secondary market to ensure transmission of its record-low interest rates, two central bank officials said July 27 on condition of anonymity. Germany’s Bundesbank repeated its opposition to sovereign debt buying last week, saying the program blurs the line between monetary and fiscal policy.

The ECB shelved its bond-buying program in March amid opposition from Weidmann and other key council members. A Bundesbank spokesman declined to say yesterday whether a discussion has taken place.

The yield on Spanish 10-year bonds dropped 13 basis points to 6.61 percent at 12 p.m. in New York, Bloomberg data show.

“I’m kind of surprised that he would put out that strong of a statement without actually having previously arranged the backing of it,” Grimm said of Draghi’s pledge to protect the euro. “If he doesn’t get anything close to what he told the markets he was going to get, everything is going to reverse itself.”

Joint Statement

Geithner met with German Finance Minister Wolfgang Schaeuble earlier today, with the two leaders issuing a joint statement backing European leaders and their efforts to preserve the currency bloc. An ECB spokeswoman didn’t comment when asked whether the bank would release a statement after Geithner’s meeting with Draghi today.

“There was not a lot of meat put on the bones of Draghi’s comments late last week so until the markets get more information, the U.S. market at least will likely tread water,” Marc Pinto, head of corporate bond strategy at Susquehanna International Group LLP, wrote in an e-mail.

The default premium on the Markit CDX North America High Yield Index, a measure of U.S. speculative-grade corporate debt risk, rose 0.3 basis point to a mid-price of 566 basis points, after climbing as much as 9.9 basis points earlier today, Bloomberg prices show.

In London, the Markit iTraxx Europe Index of 125 companies with investment-grade ratings declined 5 basis points to 157.9.

Credit swaps typically rise as investor confidence deteriorates and fall 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.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE