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Credit Swaps in U.S. Rise as China Manufacturing Shrinks in May

May 23 (Bloomberg) -- A gauge of U.S. corporate credit risk increased as data indicated that manufacturing activity in China is contracting this month.

The Markit CDX North American Investment Grade Index, a credit-default swaps benchmark that investors use to hedge against losses or to speculate on creditworthiness, rose 1.4 basis points to a mid-price of 73.2 basis points at 4:02 p.m. in New York, according to prices compiled by Bloomberg. The measure has increased for three of the last four days.

Manufacturing in China shrank for the first time in seven months in May, spurring concern that weak demand for goods globally could hinder the ability of U.S. companies to repay their debts. Central banks worldwide have suppressed borrowing costs through monetary policy and bond purchases to stimulate a global economy that grew at the slowest pace last year since 2009, data compiled by Bloomberg show.

“People are wondering if the manufacturing data has rippling effects elsewhere and whether end-demand is behind it,” John Donaldson, director of fixed income at Haverford Trust Co. in Radnor, Pennsylvania, said in a telephone interview. “Can you tell from one month’s data? No, but it raises questions.”

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

Jobless Claims

A preliminary reading of China’s Purchasing Managers’ Index fell to 49.6 in May, HSBC Holdings Plc and Markit Economics said today. A reading above 50 indicates expansion.

The credit swaps index pared its increase after the release of unemployment claims and home sales reports. Earlier the gauge added as much as 2.6 basis points to reach 74.3 basis points, Bloomberg data show.

Jobless claims decreased by 23,000 to 340,000 in the week ended May 18, according to Labor Department figures today in Washington. Sales of new U.S. homes climbed in April to the second-highest level in almost five years, Commerce Department data showed.

“We’re not out of the woods yet, and until there’s real growth in hiring, cutting meat from the bone can only go so far,” Timothy Cox, executive director of debt capital markets at Mizuho Securities USA Inc. in New York, said in a telephone interview. “People like corporate credit, but the market is looking for a chance to take a breather.”

Global Defaults

The risk premium on the Markit CDX North American High Yield Index rose 6.4 basis points to 357.8 basis points, Bloomberg prices show.

The yearly global corporate default tally rose to 36 after one issuer defaulted this week, according to a report today from Standard & Poor’s. The rating company reduced the grade of AGY Holding Corp., a manufacturer of glass fibers, to D after the Aiken, South Carolina-based company missed about $10 million in interest payments due May 15 on its $172 million of 11 percent bonds.

Those second-lien notes last traded at 51.5 cents on the dollar on April 5, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.

Of the defaults this year, 23 were based in the U.S., seven in Europe and six in emerging markets. Fifteen issuers have defaulted because of missed interest, principal or cash payments in 2013, the report said.

The average relative yield on speculative-grade, or junk-rated, debt widened 8.1 basis points to 490.6 basis points, Bloomberg data show. High-yield, high-risk debt is rated below Baa3 by Moody’s Investors Service and less than BBB- at S&P.

To contact the reporter on this story: Victoria Stilwell in New York at vstilwell1@bloomberg.net

To contact the editor responsible for this story: Alan Goldstein at agoldstein5@bloomberg.net

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