Credit Swaps in U.S. Jump After Mario Draghi’s Plan Disappoints

A gauge of U.S. corporate debt risk rose by the most in almost a month after European Central Bank President Mario Draghi failed to address doubts that his plan to buy bonds will stem the region’s 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 3.5 basis points, the most since July 6, to a mid-price of 109 basis points at 4:36 p.m. in New York, according to prices compiled by Bloomberg. The measure fell as much as 1.6 basis points earlier. Contracts tied to MGIC Investment Corp. surged.

Investors are concerned that Europe’s debt turmoil will contaminate global balance sheets and hamper companies’ ability to repay obligations. Draghi signaled today in Frankfurt that the ECB intends to team with governments to buy sovereign bonds in sufficient quantities to ease the region’s fiscal strains, while conceding that the bank’s 23-member Governing Council hasn’t reached a final agreement on the plans.

Investors were “a bit disappointed by Draghi,” Brian Jacobsen, who helps oversee $211 billion as chief portfolio strategist at Wells Fargo Advantage Funds in Menomonee Falls, Wisconsin, wrote in an e-mail. “He didn’t come out swinging with new programs.”

Bundesbank Opposition

Germany’s Bundesbank repeated its opposition to sovereign debt buying last week, saying the program blurs the line between monetary and fiscal policy. Draghi, who vowed last week to do whatever was needed to preserve the euro, said today that ECB officials are working on a plan for bond purchases that would likely focus on shorter-term maturities.

Earlier today, the ECB held its benchmark interest rate at a record low 0.75 percent and left its deposit rate at zero.

“Draghi’s comments show the intent of being supportive for reducing credit risk, but the lack of action and clarity continues to weigh on the markets,” Joel Levington, managing director of corporate credit at Brookfield Investment Management Inc. in New York, said in an e-mail.

The swaps benchmark increased even as data from the Labor Department showed today U.S. jobless claims rose less than forecast last week. The number of Americans applying for unemployment benefits climbed by 8,000 in the week ended July 28 to 365,000. Economists had called for an increase to 370,000, according to the median estimate in a Bloomberg News survey.

The default premium on the Markit CDX North America High Yield Index, a measure of U.S. speculative-grade corporate debt risk, rose 13 basis points to a mid-price of 582.7 basis points, after falling as much as 10.2 basis points earlier today, Bloomberg prices show.

In London, the Markit iTraxx Europe Index of 125 companies with investment-grade ratings rose 12.9 to 168.3, the biggest jump since April 10.

MGIC Swaps

Credit-default swaps tied to the mortgage insurer MGIC increased 9.4 percentage points to 40.7 percent upfront, according to data provider CMA, which is owned by McGraw-Hill Cos. and compiles prices quoted by dealers in the privately negotiated market. That’s in addition to 5 percent a year, meaning it would cost $4.07 million initially and $500,000 annually to protect $10 million of the company’s debt for five years.

MGIC, which hasn’t reported a profit since the second quarter 2010, said today that the net loss for the period ended June 30 widened to $273.9 million, according to a statement distributed by PR Newswire. That’s the largest quarterly decline since the Milwaukee-based company forfeited $280.1 million in the fourth-quarter of 2009, according to data compiled by Bloomberg.

Insurance Demand

“There’s demand for mortgage insurance over time because higher-quality companies don’t want to take that mortgage-default risk, but there’s nothing that suggests the companies that currently exist will be strong enough to provide new policies going forward,” Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott LLC in Philadelphia, which oversees $12 billion in fixed-income assets, said in a telephone interview.

Credit-default 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.

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