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Wells Fargo Leads Biggest Jump in Company Risk in Three Months

By Bryan Keogh and Abigail Moses

June 19 (Bloomberg) -- Wells Fargo & Co. and Walt Disney Co. led the biggest weekly increase in company bond risk in more than three months on concern economic data may point to a longer recession and more defaults.

The cost of protecting bonds of Wells Fargo rose to a six- week high after the bank’s rating was cut, according to CMA DataVision. Credit-default swaps on Bank of America Corp. jumped the most since March as investors began to see it as the second- riskiest bank behind Citigroup Inc. Contracts on Walt Disney this week gained the most since January.

Corporate credit slumped this week as economic data in the U.S. and Europe fueled concern that the worst of the global recession may not be over. A three-month credit-market rally that drove the cost of risk protection to the lowest levels since Lehman Brothers Holdings Inc. collapsed in September and record returns for company debt may have gone too far, Rajeev Shah, a credit strategist at BNP Paribas SA in London, wrote in a note to investors today.

“Recent economic reports suggest market optimism has probably run ahead of itself,†he wrote.

Output at factories, mines and utilities dropped 1.1 percent in May, and the share of industrial capacity in use slid to a record low, according to the Federal Reserve. Wholesale prices dropped 5 percent in the 12 months through May, the biggest slump in half a century.

The tally of defaults this year climbed to 159, more than four times the 37 recorded in the same period a year ago, Standard & Poor’s said today in a report.

High-Yield Decline

High-yield, high-risk bonds slumped the most in a month, with the extra interest investors demand to own the securities rather than Treasuries widening 34 basis points this week, according to Merrill Lynch & Co. index data.

“The precipitous increase in defaults reflects a pronounced decline in economic fundamentals and earnings prospects, as well as the continued credit freeze, effectively halting lending to speculative-grade borrowers,†S&P analysts led by Diane Vazza in New York said in the report.

Credit-default swaps on the Markit CDX North America Investment-Grade Index Series 12 fell 0.5 basis point to 141.5 basis points as of 4:55 p.m. in New York, according to CMA DataVision.

Contracts climbed almost 20 basis points during the week, the most since the increase of 25.5 basis points during the period ended March 6, according to CMA. Swaps on all but three companies listed in the index increased, signaling a deterioration in the perception of credit quality.

A basis point on a credit-default swap contract protecting $10 million of debt from default for five years is equivalent to $1,000 a year. A basis point is 0.01 percentage point.

High-Risk Ratings

Contracts on the Markit iTraxx Crossover Index of 45 companies with mostly high-risk, high-yield credit ratings dropped 8 basis points to 742, according to JPMorgan Chase & Co. prices in London. For the week, the index gained 64 basis points, or 9.4 percent, the biggest percentage increase since Jan. 23.

The Markit iTraxx Europe index of 125 companies with investment-grade ratings declined 2.5 basis points to 120, while rising 12.5 basis points during the week, JPMorgan prices show.

Markets are taking a breather after the rally restored relative yields to lows last seen before Lehman filed for bankruptcy, said Arthur Tetyevsky, chief fixed-income strategist at CF Global Trading LLC in New York.

“A lot of this catastrophe risk premium has been taken out of the market,†he said. “To rally forward from here on in, you really have to focus on the economy, the fundamentals.â€

Wells Fargo Climbs

Credit-default swaps on Wells Fargo, the second-largest U.S. bank by deposits, jumped 38 basis points this week to 152.75 basis points, the highest since May 7, CMA prices show. S&P cut the San Francisco-based bank one step to AA- from AA on June 17. The New York-based ratings company downgraded 17 other banks on the same day.

Contracts on Burbank, California-based Disney, the world’s largest media company, increased 10 basis points to an almost one-month high of 59.5 basis points, the largest gain since the period ended Jan. 16, according to CMA. Retailer J.C. Penney Co.’s swaps climbed 56 basis points to 250 basis points, the biggest increase since the week ended Dec. 5.

Credit-default swaps on Charlotte, North Carolina-based Bank of America rose 75 basis points to 250 basis points, higher than Morgan Stanley at 225 basis points for the first time since April. Citigroup contracts gained 73 basis points to 442.5 basis points.

Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a company fail to adhere to its debt agreements.


I think the quote from Rajeev Shah is interesting:

“Recent economic reports suggest market optimism has probably run ahead of itself,†he wrote.


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