Peter Cecchini Comments: U.S. Credit Swaps Index Rises After Jobless Claims Increase - Bloomberg News

A benchmark gauge of corporate credit risk in the U.S. rose the most in a week, erasing a decline in early trading, after applications for unemployment benefits last week unexpectedly increased to the highest since November, rekindling concerns of a wider economic slowdown.

The Markit CDX North America Investment Grade Index Series 14, which investors use to hedge against losses on corporate debt or to speculate on creditworthiness, climbed 2.6 basis point to a mid-price of 108.3 basis points as of 12:36 p.m. in New York, after earlier declining to as low as 104.8 basis points, according to Markit Group Ltd. Swaps on RadioShack Corp. fell to the lowest since May 31 as the consumer electronics retailer boosted a share buyback program, making it less attractive as a takeover target.

The jobless claims data is signaling increased risk of a bigger slowdown than credit markets have been pricing in, said Peter Cecchini, chief strategist at BGC Financial LP in New York. The Markit CDX index reached a 12-week low of 99.1 basis points Aug. 2. It typically rises as investor confidence deteriorates and declines as it improves.

“Jobless claims back at 500,000 is clearly the wrong trend,” he said. While the Federal Reserve continues to support credit markets by keeping its short-term interest-rate target near zero and purchasing Treasuries, he said, “what I worry about is when the time comes for fiscal reckoning and the bid disappears.”

Initial jobless claims rose by 12,000 to 500,000 in the week ended Aug. 14, U.S. Labor Department figures showed today.

Economists had forecast a decline to 478,000, according to the median of 42 projections in a Bloomberg News survey.

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.

Contracts on Fort Worth, Texas-based RadioShack dropped 60 basis points to 231 basis points, according to data provider CMA. The company yesterday said in a statement it boosted its share buyback program to $500 million from $290 million.

Buying back more shares makes it easier to reward investors than pursuing a leveraged buyout, Anthony Chukumba, a BB&T Capital Markets analyst, said in an Aug. 2 note to clients.

Three private-equity firms have backed away from pursuing a takeover, three people with knowledge of the plans said last month.

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