Credit Swaps in U.S. Rise as Euro Stimulus Speculation Builds

A gauge of U.S. company credit risk rose for the first time in three days, paring an earlier drop, as data showed euro-area economies are weakening further, increasing pressure on policy makers to curb the fiscal turmoil.

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 103.4 basis points at 4:41 p.m. in New York, according to prices compiled by Bloomberg. Contracts tied to Chesapeake Energy Corp. and MGM Resorts International dropped.

Investors are speculating that European leaders will act to ease soaring borrowing costs for Spain and Italy and preserve the currency bloc, protecting global balance sheets from contagion. Data today showed German factory orders declined more than twice as much as economists forecast in June, while Italy’s economy contracted for a fourth straight quarter.

“There is definite internal pressure on elected officials, in Germany in particular, over what they may or may not do” to stem the region’s debt crisis, John Donaldson, director of fixed-income at Radnor, Pennsylvania-based Haverford Trust Co., said in a telephone interview.

Bond Buying

The index, which typically rises as investor confidence deteriorates and falls as it improves, declined to the lowest since May 8 yesterday after the German government said for the first time it supports European Central Bank President Mario Draghi’s debt purchasing plan.

The rise today on the benchmark, which reached a 13-week low yesterday, doesn’t indicate “any material shift in the corporate market’s positive sentiment,” Adrian Miller, director of global markets strategy at GMP Securities LLC in New York, wrote in an e-mail. “Swap spreads have been trending lower since late July as euro risk aversion has cooled following expectations of a more aggressive ECB.”

Germany’s Economy Ministry in Berlin said today factory orders dropped 1.7 percent in June, surpassing the 0.8 percent decline called for by the median estimate in a Bloomberg News survey. Italy’s gross domestic product slipped 0.7 percent in the second quarter, according to a preliminary report from the Rome-based national statistics institute Istat today.

The yield on Spanish 10-year notes rose 12 basis points to 6.86 percent at 12:04 p.m. in New York.

Default Rate

The default premium on the Markit CDX North America High Yield Index, a measure of U.S. speculative-grade corporate debt risk, slipped 0.9 basis point to a mid-price of 553.8 basis points at 4:51 p.m. in New York, Bloomberg prices show.

The global default rate for speculative-grade debt will hold at least 1.7 percentage points below its historical average this year as high-yield companies withstand economic weakness in the U.S. and Europe, according to Moody’s Investors Service.

The ratings company’s trailing 12-month global speculative-grade default rate was 2.8 percent in July, down from a revised pace of 2.9 percent in June, New York-based Moody’s said in a report today. High-yield corporate defaults will end 2012 at a 3.1 percent pace, before slipping to 2.9 percent by July 2013, according to the report. That compares with a historical average as of July 10 of 4.8 percent since 1983.

In London, the Markit iTraxx Europe Index of 125 companies with investment-grade ratings increased 0.2 to 147.9.

Chesapeake CDS

The cost to guard against losses on the debt of Chesapeake declined 2.5 percentage points to 6 percent upfront, down from 8.5 percent yesterday, 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 $600,000 initially and $500,000 annually to protect $10 million of Chesapeake’s debt for five years.

Second-quarter net income at the second largest U.S. natural gas producer rose 91 percent to $972 million, the highest quarterly profit in the company’s history, Oklahoma City-based Chesapeake said in a statement after the close of equity trading yesterday.

Contracts tied to MGM Resorts declined 2.2 percentage points to 9 percent upfront, according to CMA, after the largest casino operator on the Las Vegas Strip reported a second-quarter loss that was smaller than analysts had forecast.

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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