U.S. Credit Swaps Rise as Traders Shift to New Benchmark
A benchmark gauge of corporate credit risk increased as banks, hedge funds and other money managers moved trades into a new version of the credit-default swaps index.
Series 20 of the Markit CDX North America Investment Grade Index, used to hedge against losses on company debt or to speculate on creditworthiness, traded at 90.7 basis points, 8.8 basis points higher than Series 19 as of 8:02 a.m. in New York, according to data compiled by Bloomberg. The new series should trade 9 basis points wider than the old benchmark, based on the cost of the individual credit swaps on companies in each index, according to JPMorgan Chase & Co. analysts.
New versions of Markit Group Ltd.’s indexes are created every six months. Companies are replaced if they no longer have appropriate credit grades, aren’t among the most actively traded borrowers or fail to meet other criteria. Block Financial LLC and Genworth Financial Inc. (GNW) were added to the new version while Canadian Natural Resources Ltd. and CenturyLink Inc. were removed.
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.
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