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U.S. Company Credit Swaps Record Biggest Weekly Drop in a Month

Feb. 7 (Bloomberg) -- A measure of U.S. corporate credit risk declined this week by the most in more than a month as investors weighed an employment report that showed hiring rose less than forecast in January.

The Markit CDX North American Investment Grade Index, a credit-default swaps benchmark used to hedge against losses or to speculate on creditworthiness, fell 3.8 basis points to 67.5 basis points for the week as of 5 p.m. in New York, the biggest weekly plunge since the five days ended Dec. 20, according to prices compiled by Bloomberg. The index decreased 2.2 basis points today, the fourth straight drop this week.

Investors are assessing a report that showed U.S. employers added fewer jobs than forecast in January as a means to gauge how quickly the Federal Reserve will reduce stimulus that has boosted the credit markets. The 113,000 gain in employment followed a 75,000 increase the prior month, Labor Department figures showed today in Washington, missing the median forecast of economists in a Bloomberg survey that called for a 180,000 advance.

The market thinks that the Fed’s tapering could be slowed down, Scott MacDonald, head of research at Stamford, Connecticut-based MC Asset Management Holdings LLC., said in a telephone interview. “They still have more data to come before the next Fed meeting and if that data is neutral or positive, I think they’ll continue with the taper.”

Fed Stimulus

The credit swaps measure 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 Fed has been scrutinizing employment data to determine the timing and pace of cuts to stimulus. The central bank last week said it will press on with a second reduction to its monthly bond buying, by $10 billion to $65 billion, citing an improvement in the labor market.

The central bank last month reiterated it’ll probably hold the target interest rate near zero “well past the time” that unemployment falls below 6.5 percent. That rate unexpectedly fell to 6.6 percent today, Labor Department data showed.

Shift to Bonds

U.S. equity funds had $24 billion of outflows in the week to Feb. 5, according to a report today from the research unit of Citigroup Inc. Money managers shifted $13 billion into U.S. bond funds, accounting for most of the $14.8 billion that flowed into debt worldwide.

The average cost of credit swaps tied to the six-biggest banks, from Goldman Sachs Group Inc. to Citigroup Inc., narrowed 7.8 basis points to 77.3 basis points for the week, the lowest level in three weeks and the biggest drop in more than two months.

The risk premium on the Markit CDX North American High Yield Index, tied to the debt of 100 speculative-grade companies, narrowed 19.1 basis points for the week to 331.2, after decreasing by 9.5 today, Bloomberg prices show. High-yield, high-risk bonds are rated below Baa3 by Moody’s Investors Service and less than BBB- at Standard & Poor’s. A basis point is 0.01 percentage point.

The extra yield investors demand to hold investment-grade corporate bonds rather than government debt rose 0.6 basis point to 112.3 for the day, Bloomberg data show.

To contact the reporter on this story: Jessica Summers in New York at jsummers20@bloomberg.net

To contact the editor responsible for this story: Shannon D. Harrington at sharrington6@bloomberg.net

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