A gauge of U.S. company credit risk fell to the lowest level in three weeks as investors expect that Federal Reserve chairman nominee Janet Yellen may maintain the central bank’s stimulus into next year.
The Markit CDX North American Investment Grade Index, a credit-default swaps measure that investors use to hedge against losses or to speculate on creditworthiness, declined 1.4 basis points to 70.2 basis points as of 4:13 p.m. in New York, according to prices compiled by Bloomberg. That’s poised for the lowest closing level since Oct. 22.
Traders have “a sense of complacency” after Yellen, the current vice chairman of the Fed, voiced her commitment to using the central bank’s bond purchases to boost growth and lower unemployment until the economy improves, according to Scott Carmack, a money manager at Leader Capital Corp. Data released today showed manufacturing in the New York region unexpectedly contracted this month, while total industrial production in the U.S. fell in October.
“Yellen has proven to be as dovish or more dovish than Ben Bernanke. We got through the government shutdown, we got through earnings season without major hiccups and your underlying money flows are bullish,” Carmack said in a telephone interview from Portland, Oregon. “Everything investors were worried about three months ago has been pushed back or eliminated.”
The swaps index typically falls as investor confidence improves and rises 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.
Yellen, nominated to succeed Ben S. Bernanke as chairman of the Fed, said in a hearing yesterday that the central bank will carry on its unprecedented stimulus for an economy that’s operating well below potential.
The central bank’s policy makers will probably pare the $85 billion monthly pace of bond buying to $70 billion at their March 18-19 meeting, according to the median of 32 estimates in a Bloomberg survey of economists on Nov. 8.
Valeant Pharmaceuticals International Inc. (VRX:US), a distributor of generic medicines, sold $900 million of 5.625 percent, eight-year senior bonds that yield 325 basis points more than similar-maturity Treasuries, according to data compiled by Bloomberg.
The debt is rated B1 by Moody’s Investors Service, the data show. Proceeds may be used to redeem Valeant’s 6.5 percent, senior notes due in 2016, according to a statement from the Bridgewater, New Jersey-based company.
The risk premium on the Markit CDX North American High Yield Index, a credit-swaps benchmark tied to speculative-grade bonds, fell 5.1 basis points to 345.8 basis points, Bloomberg prices show. A basis point is 0.01 percentage point.
The average extra yield investors demand to hold dollar-denominated, investment-grade corporate bonds rather than similar-maturity Treasuries was little changed at 130.4 basis points, Bloomberg data show. The measure for speculative-grade, or junk-rated, debt fell 2.7 basis points to 552.8.
High-yield, high-risk, or junk debt is rated below Baa3 by Moody’s and lower than BBB- at Standard & Poor’s.
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