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Corporate Credit Swaps in U.S. Little Changed After Index Shift

A measure of corporate credit risk was little changed as a new version of the index began its second day of trading amid reports that Italy and Spain won’t voluntarily seek bailouts unless bond yields surge.

The Markit CDX North America Investment Grade Index, a credit-default swaps benchmark that investors use to hedge against losses on company debt or to speculate on creditworthiness, increased 0.2 basis point to a mid-price of 96.4 basis points at 4:47 p.m. in New York. Swaps tied to Darden Restaurants Inc., the world’s largest casual-dining chain operator, fell to the lowest since July 11.

The swaps index, which typically rises as investor confidence deteriorates and falls as it improves, held above its initial trading levels yesterday as an Italian government official said no nation will voluntarily accept conditions imposed for aid. Italian and Spanish 10-year bond yields have dropped more than 1 percentage point since Aug. 2 when European Central Bank President Mario Draghi first indicated the bank would purchase debt of distressed euro-region nations.

“We’re going through a period of relatively low volatility after the big push higher in risk assets and tighter in spreads,” Jon Duensing, the Boulder, Colorado-based head of corporate credit at money manager Smith Breeden Associates, said in a telephone interview. There needs to be a catalyst to justify a move in valuations, so “market participants are keeping one eye on Europe, particularly Spain and Italy, to see what they may do with bailout assistance.”

Index Roll

The measure rose 10.7 basis points yesterday as banks, hedge funds and other money managers shifted trades into a new version of the index. The composition of companies in the benchmark is updated every six months, changing the value of the underlying securities.

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.

Contracts tied to Darden Restaurants declined 18.5 basis points to 145 basis points as of 4:30 p.m. in New York, according to data provider CMA, which is owned by McGraw-Hill Cos. and compiles prices quoted by dealers in the privately negotiated market. The Orlando, Florida-based restaurant chain operator beat analysts’ estimates of its fiscal first-quarter earnings, helped by better-than-expected same-store sales at Olive Garden, the company’s largest brand.

The U.S. two-year interest-rate swap spread, a measure of stress in credit markets, declined by the most in a week, decreasing 0.45 basis point to 12.93 basis points. The measure falls when investors favor assets such as corporate bonds and rises when they seek the perceived safety of government securities.

The risk premium on the Markit CDX North America High Yield Index, a measure of U.S. speculative-grade corporate debt risk, rose 1.9 basis points to a mid-price of 457.5 basis points, Bloomberg prices show. The high-yield index will begin the switch to a new series on Sept. 27.

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