U.S. Company Credit Swaps Fall as ECB Says Bond Buys Unlimited

A gauge of corporate credit risk dropped to the lowest level since May after European Central Bank President Mario Draghi said the bank will make unlimited bond purchases.

The Markit CDX North America Investment Grade Index, a credit-default swaps benchmark that investors use to hedge against losses on corporate debt or to speculate on creditworthiness, declined 5.7 basis points to a mid-price of 94.9 basis points at 5:32 p.m. in New York, the lowest level since May 2, according to prices compiled by Bloomberg. That’s the biggest one-day decrease since July 27.

The swaps measure fell as the ECB chief said policy makers agreed to an unlimited bond-purchase program as they try to regain control of interest rates in the euro area, reassuring investors that leaders are working to stem damage from the fiscal crisis. Steps to curb the region’s debt-market upheaval may reduce concern that the turmoil will infect bank balance sheets globally.

“We will have a fully effective backstop to avoid destructive scenarios with potentially severe challenges for price stability,” Draghi said at a press conference in Frankfurt today.

Purchases will be fully sterilized, meaning that the overall impact on the money supply will be neutral, he said.

“He’s telling the market, ‘we’re going to start up the printing press,”’ said Bonnie Baha, head of global developed credit at Los Angeles-based DoubleLine Capital LP, which oversees $40 billion. “Investors have just adopted this cavalier attitude that maybe if ECB officials talk enough the situation will just resolve itself.”

‘Printing Press’

In the U.S., a report showed fewer Americans than forecast filed applications for unemployment benefits last week. Labor Department figures showed jobless claims decreased by 12,000 to 365,000 in the week ended Sept. 1. That eased investor concern that the labor market may weaken in the second half, damping the economic recovery.

The credit swaps index typically falls as investor confidence improves and rises as it deteriorates. 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.

The U.S. two-year interest-rate swap spread, a measure of stress in credit markets, declined 0.13 basis point to 16.5 basis points. The measure, which falls when investors favor assets such as corporate bonds and rises when they seek the perceived safety of government securities, has eased from 54.7 basis points in November.

Morgan Stanley

The cost to protect Morgan Stanley’s debt for five years dropped to the lowest since February. Credit swaps on the company’s debt fell 33 basis points to 272.5 basis points as of 4:30 p.m. New York time, according to data provider CMA, which is owned by McGraw-Hill Cos. and compiles prices quoted by dealers in the privately negotiated market.

Credit swaps tied to H&R Block Inc.’s financial unit dropped after the biggest U.S. tax preparer’s net loss narrowed last quarter to $107.4 million, from $175.1 million a year earlier. Contracts linked to debt issued by Block Financial LLC dropped 47 basis points to 308.3, CMA data show.

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