A gauge of U.S. company credit risk held at about a six-year low amid speculation that the Federal Reserve may delay cutting back stimulus. The cost to protect the debt of Morgan Stanley (MS:US) fell.
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, decreased 0.1 basis point to 71.3 basis points at 4:32 p.m. in New York, according to prices compiled by Bloomberg. That’s poised for the lowest closing level since Nov. 6, 2007, using data that adjust for the effects of the market’s shift to a new version of the index last month.
Economic damage from a two-week partial government shutdown may convince the Fed to postpone reducing its bond-buying program until next year, boosting investor confidence in credit markets, according to William Larkin, a fixed-income money manager at Cabot Money Management.
“We know we’re going to be supported for a while so the outlook is optimal from that standpoint,” Larkin said in a telephone interview from Salem, Massachusetts.
The index typically falls as investor confidence improves and climbs as it deteriorates. Credit swaps 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.
Effects of the shutdown, which resulted in employee furloughs and government service stoppages, shaved at least 0.6 percent from fourth-quarter 2013 gross domestic product growth and took $24 billion out of the economy, according to Standard & Poor’s.
“There’s talk about how much gross domestic product the shutdown took out and how much of an impact it had on spending confidence,” Larkin said.
Chicago Fed President Charles Evans said yesterday the U.S. shouldn’t reduce stimulus after some economic reports stopped during the 16-day government closure.
The U.S. central bank will delay the first reduction in its bond purchases until March, when policy makers will pare the monthly pace of asset buying to $70 billion from $85 billion at their meeting that month, according to the median of 40 responses in a Bloomberg News survey of economists.
Morgan Stanley is no longer perceived to be the riskiest of the six biggest U.S. banks, with credit-default swaps tied to the New York-based bank dropping below those tied to Goldman Sachs Group Inc. (GS:US) for the first time since June 2011.
The contracts fell 11 basis points to 110.5 basis points as of 4:05 p.m. in New York, lower than Goldman Sachs’s 114 basis points, according to data provider CMA, which is owned by McGraw Hill Financial Inc. and compiles prices quoted by dealers in the privately negotiated market. A basis point is 0.01 percentage point.
The bank today reported third-quarter earnings that exceeded analysts’ estimates as equity trading revenue jumped and profitability at the brokerage climbed. Morgan Stanley Chief Executive Officer James Gorman is relying more on retail brokerage to help drive the firm’s results after buying the remaining portion of a wealth-management joint venture with Citigroup Inc. earlier this year.
The risk premium on the Markit CDX North American High Yield Index, a credit-swaps benchmark tied to speculative-grade bonds, fell 2.5 basis points to 343.5 basis points, Bloomberg prices show.
The average extra yield investors demand to hold dollar-denominated, investment-grade corporate bonds rather than similar-maturity Treasuries narrowed 1.7 basis points to 125.6 basis points, Bloomberg data show. The measure for speculative-grade, or junk-rated, debt fell 5.5 basis point to 652.3.
Investment-grade debt is rated Baa3 or higher at Moody’s and at least BBB- by S&P.
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