Credit-default swaps in US increase for first time in 10 days

March 20 (Bloomberg) -- -- A benchmark gauge of U.S. company credit risk rose for the first time in 10 days as banks, hedge funds and other money managers moved trades into a new version of the index.

Series 18 of the Markit CDX North America Investment Grade Index, which investors use to hedge against losses on corporate debt or to speculate on creditworthiness, traded at 90.5 basis points, about 6.3 basis points higher than Series 17, as of 12:10 p.m. in New York, according to broker Phoenix Partners Group.

New versions of Markit Group Ltd.’s indexes, which typically rise as investor confidence deteriorates and fall as it improves, 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.

The roll is “a little bit technical for the market, and a lot annoying for most clients,” according to Peter Tchir, founder of TF Market Advisors in New York. Traders wanting to buy protection often wait until after the roll to enter, especially when the market has been rallying, he said.

Confidence in high-yield, high-risk debt in the U.S. declined as BHP Billiton Ltd., the world’s largest mining company, said China’s steel production is slowing. Markit’s CDX North America High Yield Index, which falls as investor confidence deteriorates, declined 0.1 percentage point to 98.9% of face value, Markit prices show. The benchmark has climbed from 93.5 on Jan. 9. That index rolls into a new series next week.

New High-Yield Series

Credit swaps 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 investment-grade gauge increased after a nine-day decline, the longest losing streak since December 2010, as an official from the China Association of Automobile Manufacturers said the nation’s vehicle sales may miss industry forecasts this year as economic growth slows.

This measure touched 84.7 basis points yesterday, the lowest level since March 2011, on optimism about the strength of the world’s biggest economy after the Federal Reserve raised its assessment at its March 13 policy meeting.

The U.S. two-year interest-rate swap spread, a measure of stress in credit markets, widened 1.80 basis points to 27.25 basis points. The measure rises when investors seek the perceived safety of government securities and falls when they favor assets such as corporate bonds.

Bloomberg News

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