Credit Swaps Rise to Two-Month High on Emerging-Market Concern

A gauge of U.S. corporate credit risk jumped to the highest in more than two months as investors sought protection from losses amid a plunge in emerging markets from Argentina to Turkey.

The Markit CDX North American Investment Grade Index, a credit-default swaps benchmark used to hedge against losses or to speculate on creditworthiness, climbed 4.9 basis points to 72.7 basis points as of 5:29 p.m. in New York, the highest level since Nov. 19, according to prices compiled by Bloomberg. The index increased 7.5 basis points this week, capping the biggest weekly jump since June.

Investors sought protection as everything from stocks to emerging-market currencies plunged following a report yesterday signaling weakness in China’s economy, the world’s second-biggest. A measure of debt-market stress known as the two-year swap spread jumped to the highest since September, while the average cost to protect against defaults by the six-biggest U.S. banks rose the most in seven months.

“That tells me that concerns about macro things like the emerging markets are going to start to dominate for the next four to eight weeks,” Brian Reynolds, chief market strategist for brokerage firm Rosenblatt Securities Inc. in New York, said in a telephone interview about the jump in swap spreads and bank credit swaps.

Currency Selloff

The CDX 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.

The average cost of credit swaps tied to the six-biggest banks, from Goldman Sachs Group Inc. to Citigroup Inc., rose 8.6 basis points to 85.3 basis points, the highest level since Nov. 21 and the biggest increase since June 24.

The U.S. two-year interest-rate swap spread added 1 basis point to 15.2 basis points, reaching the highest level since Sept. 24. The gauge typically widens when investors seek the perceived safety of government debt and narrows when they favor assets such as corporate bonds.

Emerging-market currencies had their worst selloff in five years yesterday as Argentine policy makers devalued the peso by reducing support in the foreign-exchange market, the Turkish lira dropped, Ukraine’s hryvnia fell to a four-year low and South Africa’s rand weakened beyond 11 per dollar for the first time since 2008.

IMF Forecast

The International Monetary Fund predicts that the growth advantage of emerging markets over advanced economies will shrink this year to the smallest since 2001. The Washington-based institute kept its expansion forecast for developing countries this year at 5.1 percent on Jan. 21, while raising the outlook for advanced economies to 2.2 percent, from the 2 percent estimated in October.

The risk premium on the Markit CDX North American High Yield Index, tied to the debt of 100 speculative-grade companies, widened 22.6 basis points to 352.3, extending a weekly increase to 34.6, 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.

The extra yield investors demand to hold investment-grade corporate bonds rather than government debt rose 3.2 basis points to 111.7, Bloomberg data show.

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