A gauge of U.S. corporate credit risk fell for the first time in three days, retreating from the highest level in about two weeks.
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, dropped 1 basis point to a mid-price of 88.6 basis points at 5:53 p.m. in New York, according to prices compiled by Bloomberg.
The measure earlier rose to as much as 92.8 basis points, the highest intra-day level since reaching 96.7 on Jan. 2, on investor concern that the government may not reach a compromise on its debt limit. A failure to prevent a breach of the $16.4 trillion limit might tip the economy into a recession, hindering companies’ ability to repay debt.
“There is a desire to add protection, as we are nearing the debt ceiling,” Brian Reynolds, the New York-based chief market strategist for brokerage firm Rosenblatt Securities Inc., said in a telephone interview. “That seems to be the major driver.”
The credit-swaps index typically falls as investor confidence improves and rises as it deteriorates. 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 cost to protect Dell Inc.’s (DELL:US) debt from default for five years jumped for a second day. Credit swaps on the company’s bonds surged to 354.1 basis points as of 4:30 p.m. in New York, according to data provider CMA, which is owned by McGraw Hill. That’s up from 254 basis points yesterday, CMA prices show.
Dell is in buyout talks with at least two firms, according to a person with knowledge of the matter who asked not to be identified because the talks are private.
The risk premium on the Markit CDX North American High Yield Index declined 4.1 basis points to 447.3 basis points, Bloomberg prices show.
The average relative yield on junk-rated debt rose 2 basis points to 4.8 percentage points today. Spreads on the bonds of utility companies widened 10 basis points to 9.5 percentage points, Bloomberg data show. High-yield, high-risk debt is rated below Baa3 by Moody’s Investors Service and lower than BBB- at Standard & Poor’s. A basis point is 0.01 percentage point.
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