A gauge of U.S. corporate credit risk rose for the first time in more than a week as lawmakers prepared to debate the so-called fiscal cliff.
The Markit CDX North American Investment Grade Index, a credit-default swaps benchmark that investors use to hedge against losses or to speculate on creditworthiness, climbed 1.7 basis points to a mid-price of 100.8 basis points at 4:24 p.m. in New York, according to prices compiled by Bloomberg.
The Congressional Budget Office has said a failure to avoid $607 billion in spending cuts and tax increases set to take effect next year could lead to a recession and a jobless rate of about 9 percent, compared with the October rate of 7.9 percent. Congress returns from the Thanksgiving recess this week seeking a budget deal to avert that scenario.
“Everybody’s trying to get a hold of this political cliff situation,” William Larkin, a fixed-income money manager at Cabot Money Management Inc. in Salem, Massachusetts, said in a telephone interview. “It makes a lot of people nervous because we’re running out of runway.”
In Europe, finance ministers meet in Brussels for a third time this month to try to release an aid payment to Greece and produce a plan to keep the country a solvent member of the currency bloc. They failed to make the decisions in two previous meetings this month.
The credit-swaps index typically rises as investor confidence deteriorates and falls as it improves. The contracts 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 average relative yield for investment-grade bonds will probably trade at about 10 basis points wider than the average cost to protect the debt with credit-default swaps in 2013, JPMorgan Chase & Co. strategists led by Eric Beinstein wrote in a research note today to clients. Average bond spreads were trading at 4 basis points more than protection costs according to a Nov. 16 report from JPMorgan analysts.
Credit swap spreads may tighten more than those of bonds partly because of “less bank buying of CDS protection as they instead hold larger capital buffers,” according to today’s note.
Amazon.com Inc. (AMZN:US), the world’s largest online retailer, issued $3 billion of debt in three parts in its first bond offering in more than a decade. The company sold $750 million of 0.65 percent, three-year notes to yield 38 basis points more than similar-maturity Treasuries, $1 billion of 1.2 percent, five-year debt with a 63 basis-point spread, and $1.25 billion of 2.5 percent, 10-year securities with 93 basis points of extra yield, Bloomberg data show.
The average relative yield on speculative-grade debt dropped 4 basis points to 5.85 percentage points, led by spreads on the bonds of utility companies which narrowed 19 basis points to 12.88 percentage points, according to data compiled by Bloomberg. High-yield, high-risk debt is rated below Baa3 by Moody’s Investors Service and lower than BBB- at Standard & Poor’s.
The U.S. two-year interest-rate swap spread, a measure of stress in credit markets, rose 0.25 basis point to 13.25 basis points, according to Bloomberg prices. The spread typically widens when investors seek the perceived safety of government securities and narrows when they favor assets such as corporate bonds.
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