Bloomberg News

U.S. High Yield Index Gains on Bets Fed Plans More Stimulus

September 20, 2011

Sept. 20 (Bloomberg) -- Confidence in high-yield, high-risk debt in the U.S. gained as investors wagered the Federal Reserve will provide more stimulus to the economy, overshadowing Europe’s intensifying debt crisis.

Markit’s CDX North America High Yield Index, which rises as investor confidence improves, added 0.4 percentage point to 93.7 percent of face value as of 4:46 p.m. in New York, according to index administrator Markit Group Ltd. The benchmark index has climbed four of the past six days from 91 on Sept. 12, the lowest level in two years.

Investors are anticipating actions that may revive the economy after U.S. housing starts dropped and the International Monetary Fund lowered its forecast for global growth. Standard & Poor’s cut Italy’s credit rating to A from A+ yesterday underscoring concerns that Europe’s debt crisis is spreading, said Mikhail Foux, a credit strategist at Citigroup Inc. in New York.

“People are just looking past that and they’re looking at what the Fed is going to do,” Foux said in a telephone interview.

The Fed’s Open Market Committee ends its two-day policy meeting tomorrow and may announce it plans to deploy a policy tool known as “Operation Twist” in which it would replace short-term Treasuries in its $1.65 trillion portfolio with long- term bonds.

New Series

A benchmark indicator of U.S. company credit risk rose as banks, hedge funds and other money managers moved trades into a new series of the index.

Series 17 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 133.5 basis points, 8.1 basis points wider than Series 16, as of 4:25 p.m. in New York, according to broker Phoenix Partners Group.

New versions of Markit’s index, which typically rises as investor confidence deteriorates and falls 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. Contracts on individual credits also roll today. The high yield index rolls to a new series on Sept. 27.

In a sign that real estate is struggling to recover, housing starts dropped 5 percent to a three-month low 571,000 annual rate, Commerce Department figures showed today in Washington. The median forecast in a Bloomberg News survey called for a 590,000 pace.

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.

--Editors: Alan Goldstein, Pierre Paulden, Mitchell Martin

To contact the reporter on this story: Mary Childs in New York at mchilds5@bloomberg.net

To contact the editor responsible for this story: Alan Goldstein at agoldstein5@bloomberg.net


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