Bloomberg News

Credit Swaps in U.S. Hold; Wells Fargo Sells $5 Billion of Debt

July 22, 2013

A gauge of U.S. corporate credit risk held near a two-month low as investors await earnings reports. Wells Fargo & Co. (WFC:US) raised $5 billion in a four-part bond sale.

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 0.1 basis point to a mid-price of 72.7 basis points as of 4:46 p.m. in New York, according to prices compiled by Bloomberg. The measure earlier fell to 71.8, the lowest intraday level since May 23.

More than 150 Standard & Poor’s 500-listed companies, including Apple Inc., Amazon.com Inc. and Facebook Inc., report their earnings this week as investors look for a means to assess companies’ ability to repay debt obligations. Of the 111 names in the index to have already reported quarterly results, 72 percent have exceeded analysts’ profit estimates and 51 percent have beaten sales projections, according to data compiled by Bloomberg.

Results have been “stronger than what was expected at the outset of earnings season,” RBS Securities Inc. strategists led by Edward Marrinan wrote in a research report today. “Our qualified enthusiasm for corporate credit stems from the fact that the June selloff rendered valuations attractive, while corporate fundamentals remain strong and the macroeconomic environment is slowly improving.”

Bondholder Protection

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 measure has fallen from a 2013 high of 97.6 on June 24, as remarks last week from Federal Reserve Chairman Ben S. Bernanke alleviated concern the central bank will soon begin reducing $85 billion in monthly bond purchases.

“Most of the tapering concerns that led to the recent selloff have eased,” Dorian Garay, a money-manager for an investment-grade debt fund at ING Investment Management, said in a telephone interview from New York. “It seems, from the Fed’s rhetoric, that tapering is subject to how the economy is performing in the next few months.”

Wells Fargo

The largest portion of San Francisco-based Wells Fargo’s sale consisted of $2 billion of two-year notes that float at 28 basis points more than the three-month London interbank offered rate, Bloomberg data show.

Charles Schwab Corp. (SCHW:US) sold $275 million of 2.2 percent, five-year notes that yield 90 basis points more than similar-maturity Treasuries, Bloomberg data show.

The average relative yield on investment-grade debt tightened 2 basis points to 126.6 basis points, Bloomberg data show.

The risk premium on the Markit CDX North American High Yield Index increased 2.3 basis points to 352.6 basis points, Bloomberg prices show.

Five-year credit swaps to protect against the default of Barrick Gold Corp. tightened 28.8 basis points to 268.6 basis points as of 4:55 p.m. in New York as gold advanced the most in more than a year.

Default swaps tied to the Toronto-based gold producer have fallen six straight trading days as gold prices rebound on speculation the Fed will maintain its stimulus measures. The spot price of gold increased 3 percent to $1,335.82 as of 5:03 p.m. in New York, the biggest gain since June 2012.

The average relative yield on speculative-grade, or junk-rated, debt fell 2 basis points to 530.9 basis points, Bloomberg data show. High-yield, high-risk debt is rated below Baa3 by Moody’s Investors Service and lower than BBB- at S&P.

To contact the reporter on this story: Scott Harrison in New York at sharrison52@bloomberg.net

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


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Companies Mentioned

  • WFC
    (Wells Fargo & Co)
    • $51.49 USD
    • -0.32
    • -0.62%
  • SCHW
    (Charles Schwab Corp/The)
    • $27.1 USD
    • 0.20
    • 0.74%
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