Credit Swaps in U.S. Fall as Payrolls Rise More Than Estimated

A gauge of U.S. corporate debt risk fell to the lowest since May after Labor Department data showed U.S. payrolls rose more than economists had expected.

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, decreased 5.4 basis points to a mid-price of 103.6 basis points at 5:01 p.m. in New York, according to prices compiled by Bloomberg. That’s the lowest since the measure closed at 103.5 basis points on May 9. Contracts on American International Group Inc. fell.

The greater-than-expected rise in U.S. hiring may signal an improvement in weak economic conditions that have stoked investor concerns that companies may struggle to repay borrowings. The unemployment rate remains at more than 8 percent for a 42nd month. The Federal Reserve said this week it was ready to unleash new stimulus measures if the labor market fails to improve at an appropriate pace and growth falters.

“Expectations are so muted and there’s so much concern and worry that given the decent number, all of a sudden that makes a big difference on perceived risk,” Maury Harris, chief economist at UBS AG in New York, said in a telephone interview.

“This isn’t an impossible to believe number,” he said. “Unemployment claims on a four-week average have been drifting down.”

Job Gains

U.S. employers added 163,000 jobs in July, beating the 100,000 in payroll gains called for by the median estimate of economists surveyed by Bloomberg News. The unemployment rate, calculated from a separate survey, climbed to 8.3 percent last month, up from 8.2 percent in June. The jobless rate has exceeded 8 percent since February 2009, the longest stretch in monthly records dating back to 1948.

The Federal Open Market Committee “will provide additional accommodation as needed to promote a stronger economic recovery and sustained improvement in labor market conditions in a context of price stability,” the central bank said in an Aug. 1 statement at the end of its two-day meeting in Washington.

The benchmark swaps index more than erased gains from yesterday that were the biggest in almost a month after European Central Bank President Mario Draghi failed to spell out details of a plan to tame soaring borrowing costs in the euro area through sovereign debt purchases.

AIG Swaps

The cost to guard against losses on the debt of AIG fell to the lowest since May after the U.S. Treasury Department said it would sell $4.5 billion of its stake in the company, with credit-default swaps tied to the company declining 8.2 basis points to a mid-price of 204.7 basis points at 5 p.m. in New York, Bloomberg prices show.

AIG, the insurer whose government bailout swelled to $182.3 billion, plans to purchase as much as $3 billion of the shares. The offering is the smallest of four share sales by the government, whose stake in the New York-based company was cut to 61 percent from 92 percent after the first three auctions. AIG said yesterday second-quarter net income jumped 27 percent to $2.33 billion.

The default premium on the Markit CDX North America High Yield Index, a measure of U.S. speculative-grade corporate debt risk, fell 25.4 basis points to a mid-price of 557.1 basis points, the lowest since March 27, Bloomberg prices show.

In London, the Markit iTraxx Europe Index of 125 companies with investment-grade ratings declined 18.5 to 149.7.

Credit-default swaps typically fall as investor confidence improves and rise as it deteriorates. 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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