Corporate and sovereign credit risk indicators worldwide reached or approached the highest levels in 10 months as heightened military tension in the Korean peninsula and a drop in the euro fueled concern that a global recovery will be derailed.
Credit-default swaps benchmarks in Europe and Asia climbed to or near their highest levels since July while a North American credit-swap index approached a 10-month high reached May 7, the day after the Dow Jones Industrial Average plunged almost 1,000 points.
Investors are cutting holdings of risk assets after North Korean leader Kim Jong Il ordered the military to prepare for combat and US said it will hold anti-submarine exercises with South Korea following the March 26 torpedoing of a warship. The euro slumped to near a four-year low after the International Monetary Fund urged Spain to overhaul ailing banks as the nation’s financial sector “remains under pressure.”
“Asia is perceived as the growth engine of the recovery,” said Andrea Cicione, a credit strategist at BNP Paribas SA in London. “People are starting to question whether we can have a global recovery if Asia stumbles, and anything pointing in the direction of Asia stumbling is a reason for concern.”
Credit-default swaps on the Markit iTraxx Crossover Index of 50 European companies with mostly junk credit ratings climbed as much as 67.9 basis points to a mid-price of 652.1 basis points before falling to 636.7, according to prices from Markit Group Ltd. The index is trading at the highest levels since July 29, end-of-day prices from CMA DataVision show.
Recent high
The Markit CDX North America Investment Grade Index, which investors use to hedge against losses on corporate debt or to speculate on creditworthiness, rose as much as 9.25 basis points to 134.5 basis points before dropping to 130.9 as of 9.53 am in New York, according to Markit prices. The index approached the 10-month high of 137.4 basis points reached on May 7.
The Markit iTraxx Asia index of credit-default swaps on 50 investment-grade borrowers outside Japan surged 21.5 basis points to 170 basis points, the highest since July 17, according to CMA. The credit swaps indexes typically rises as investor confidence deteriorates; a decline signals the opposite.
The perception of credit worthiness is fading as global stocks slump, the euro drops to a more than four-year low against the dollar, benchmark German bund yields plunge to their lowest in at least two decades and the 10-year US Treasury note fell to its lowest in more than a year.
US banks
Contracts on Goldman Sachs Group Inc, the bank facing fraud allegations from US Securities and Exchange Commission, rose 13 basis points to 210 basis points, according to Phoenix. Contracts on Citigroup Inc. jumped 18 to 215 and Bank of America Corp swaps rose 13 to 180.
The cost of insuring against losses on South Korean government debt rose 33 basis points to 176, helping push the Markit iTraxx SovX Asia Pacific Index 26 basis points higher to 174, according to CMA.
“Deterioration of the political situation on the Korean peninsula” pushed swap prices higher, said Brayan Lai, a Hong Kong-based credit analyst at Credit Agricole CIB. “The Asian credit default-swap indices have many Korean constituents.”
Kim put the nation’s military on alert in a May 20 broadcast, the North Korea Intellectuals Solidarity group said in a report on its website, citing a person in the communist country.
