Bloomberg News

U.S. Credit Swaps Decline to Two-Year Low as Jobless Rate Falls

March 08, 2013

A gauge of U.S. corporate credit risk dropped to a two-year low as the unemployment rate fell to the least since 2008.

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, declined 2 basis points to a mid-price of 80.6 basis points at 4:13 p.m. in New York, according to prices compiled by Bloomberg. That’s the lowest level since the measure closed at 79.7 basis points on Feb. 21, 2011.

Payrolls increased in February and the jobless rate fell to 7.7 percent from 7.9 percent, Labor Department figures showed today in Washington. Hiring in construction jumped by the most in almost six years. Signs that the labor market is strengthening may ease investor concern that an economic slowdown will constrain companies’ ability to repay obligations.

“Business sentiment is improving as is demonstrated by the strong economic data in the U.S.,” Scott Carmack, a portfolio manager at Leader Capital Corp. in Portland, Oregon, said in a telephone interview today. “This market has finally changed and shed the bear market mentality, and short-term corporate bonds will benefit the most in credit markets.”

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.

Sales Fall

Sales of corporate bonds in the U.S. fell this week and relative yields narrowed as political wrangling in Washington deterred borrowers.

International Lease Finance Corp., the commercial aircraft unit of insurer American International Group Inc., and Burlington Northern Santa Fe led issuance of about $25 billion, down from $35.2 billion last week, according to data compiled by Bloomberg. Sales this year total $307 billion, below $344.9 billion sold in the similar period 2012.

The risk premium on the Markit CDX North American High Yield Index fell 8.5 basis points to 404.4 basis points, the lowest level in two years, Bloomberg prices show.

Defaults Hold

The trailing 12-month, global default rate for high-yield bonds graded by Moody’s Investors Service held at 2.7 percent in February, according to a report from the ratings company. Defaults in North America were 3.3 percent.

The ratings firm forecasts global defaults will end this year at 2.7 percent. Default rates will be the highest in the forest products and paper sector in the U.S., the company expects, analysts led by Albert Metz, wrote in the report.

The average relative yield on speculative-grade, or junk- rated, debt fell 1.6 basis points to 492.8 basis points, data compiled by Bloomberg show. High-yield, high-risk debt is rated below Baa3 by Moody’s and less than BBB- at Standard & Poor’s.

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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