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Credit Swaps in U.S. Drop as Investors Search for Stimulus Clues

A gauge of U.S. corporate credit risk fell from a two-month high as investors sought clues in labor-market data about the pace of central bank debt purchases.

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, declined 2.2 basis points to a mid-price of 83.8 basis points at 4:13 p.m. in New York, according to prices compiled by Bloomberg. The gauge earlier climbed as much as 2.7 basis points as weekly jobless claims data came in higher than economists’ forecasts and the previous week’s level was revised upward.

Investors are scrutinizing economic data to gauge when the Federal Reserve will begin to pare monthly purchases of $85 billion of government and mortgage-backed securities, a policy known as quantitative easing that’s intended to support growth.

“We’ll continue to see this kind of volatility as long as the economic data is so hard to interpret,” James Kochan, chief fixed-income strategist at Wells Fargo Asset Management LLC in Menomonee Falls, Wisconsin, said in a telephone interview.

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.

Jobless Claims

The risk premium on the Markit CDX North American High Yield Index dropped 15 basis points to 412.9 basis points, Bloomberg prices show. The measure earlier climbed as high as 462.2 basis points, the highest level since Feb. 26.

The investment-grade gauge yesterday climbed to 86 basis points, the highest level since April 5.

Applications for jobless benefits fell to 346,000 in the week ended June 1 from a revised 357,000 in the previous period, initially reported as 354,000, Labor Department figures showed today. The median forecast of 47 economists surveyed by Bloomberg called for a drop to 345,000 in the latest period.

Unemployment claims, which track weekly firings, need to fall before job growth, measured by the monthly non-farm payrolls report, can accelerate. Employers in the U.S. probably added 163,000 jobs in May, 2,000 fewer than were added the month before, according to the median forecast in a Bloomberg survey before a Labor Department report tomorrow.

The data “fluctuates between a good release and a softer release,” Kochan said. “We’ll see what tomorrow brings.”

Junk ETFs

Losses on junk-bond exchange-traded funds are outpacing the broader U.S. speculative-grade market by the most in three years, signaling a deepening slump for debt that traded at record-high prices less than a month ago.

BlackRock Inc.’s $14.2 billion iShares iBoxx High Yield Corporate Bond ETF, the biggest of its kind, plunged 2.6 percent in May, 2.1 percentage points more than the decline in the Bank of America Merrill Lynch U.S. High Yield Index. Investors redeemed 3.3 million shares, or about $305 million, from the fund June 4, its biggest one-day outflow on record.

The average relative yield on speculative-grade, or junk-rated, debt widened 7.5 basis points to 549.3 basis points, Bloomberg data show. High-yield, high-risk debt is rated below Baa3 by Moody’s Investors Service and less than BBB- at Standard & Poor’s.

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