Bloomberg News

U.S. Company Credit Swaps Rise as Fed Minutes Show Policy Debate

February 20, 2013

A gauge of U.S. corporate credit risk climbed after minutes from the Federal Open Market Committee’s meeting showed policy makers said the central bank should be ready to vary the pace of asset purchases.

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, increased 2.2 basis points to a mid-price of 87.6 basis points at 3:33 p.m. in New York, according to prices compiled by Bloomberg.

The minutes released by the Federal Reserve for the Jan. 29-30 meetings showed policy makers were divided about the strategy behind Chairman Ben S. Bernanke’s program of buying bonds until there is “substantial” improvement in the labor market, with some saying an earlier end to purchases might be needed, and others warning against a premature withdrawal of stimulus.

“The quantitative easing may not be as aggressive as some have hoped and the market has been pricing in $85 billion a month of Fed purchases,” Peter Tchir, founder of New York-based TF Market Advisors, said in an e-mailed note. This is “not a good sign” for credit investors, as it signals purchasing could be cut sooner, Tchir said.

Timing Key

The officials “emphasized that the committee should be prepared to vary the pace of asset purchases, either in response to changes in the economic outlook or as its evaluation of the efficacy and costs of such purchases evolved,” according to the minutes.

“Timing the pace of quantitative easing will be key to balance out economic growth and avoiding asset bubbles,” Dorian Garay, a New York-based money manager for an investment-grade debt fund at ING Investment Management, said in an e-mail. “If they unwind too fast, the economic recovery can stall.”

The FOMC at its January meeting decided to continue buying $45 billion a month of Treasuries and $40 billion in mortgage- debt without setting a limit on the duration or total size of the purchases. Policy makers also decided to keep interest rates unchanged unless unemployment remained above 6.5 percent and inflation was projected to be no more than 2.5 percent.

The risk premium on the Markit CDX North American High Yield Index increased 10 basis points to 440.4 basis points, Bloomberg prices show.

Liquidity Stress

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.

Speculative-grade borrowers are taking advantage of accessible credit markets and low interest rates improving liquidity in the market, Moody’s Investors Service said in a Feb. 19 report.

The ratings company’s Liquidity-Stress Index, which typically falls when corporations’ ability to manage cash needs improves, dropped to a record low of 3 percent in January, analysts led by John Puchalla wrote in the report.

The average relative yield on speculative-grade or junk- rated debt widened 0.7 basis point to 499 basis points, according to Bloomberg data.

High-yield, high-risk debt is rated below Baa3 by Moody’s and lower than BBB- at Standard & Poor’s. A basis point is 0.01 percentage point.

To contact the reporter on this story: Madhura Karnik in New York at mkarnik@bloomberg.net

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


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