Bloomberg News

Credit Swaps in U.S. Drop Most in Two Months; Issuance Declines

December 20, 2013

A gauge of U.S. company credit risk is capping its biggest weekly decline in about two months after the Federal Reserve said it will take the first steps in unwinding its unprecedented stimulus measures. Corporate bond sales fell.

The Markit CDX North American Investment Grade Index, a credit-default swaps benchmark used to hedge against losses or to speculate on creditworthiness, fell 5.4 basis points this week to 64.6 basis points as of 4:31 p.m. in New York, the lowest level since October 2007, according to prices compiled by Bloomberg. The drop is the biggest since a 5.6 basis-point decline in the five days ended Oct. 18.

The swaps index decreased as Fed Chairman Ben S. Bernanke said the central bank would trim monthly bond purchases to $75 billion from $85 billion, affirming investor optimism in the U.S. economic recovery. The Fed also said it will keep buying bonds, a program that’s bolstered credit markets, until the outlook for employment has improved substantially.

“We have a Fed that wants — above all — to remain accommodative even as the economic data has been trending stronger in recent months,” analysts led by Edward Marrinan at RBS Securities Inc., wrote in a report today. “The chairman also gave the financial markets one final parting gift; a booming rally in risk assets.”

The jobless rate fell to 7 percent in November, a five-year low, as employers added a greater-than-forecast 203,000 workers to payrolls. Unemployment has declined from 10 percent in October 2009.

Fed Purchases

The central bank’s purchases of housing debt and Treasuries will each fall by $5 billion next month, divided between $40 billion in government securities and $35 billion in mortgage bonds starting in January, the Fed said on Dec. 18.

The credit-swaps benchmark, which typically falls as investor confidence improves and rises as it deteriorates, has averaged 79.7 basis points this year. 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 risk premium on the Markit CDX North American High Yield Index, tied to the debt of 100 speculative-grade companies, decreased 7.1 basis points today to 318.8, extending the drop for the week to 23.4, Bloomberg prices show. High-yield, high-risk bonds are rated below Baa3 by Moody’s Investors Service and less than BBB- at Standard & Poor’s. A basis point is 0.01 percentage point.

Corporate bond offerings dropped 68 percent to $8 billion, the least since $2.1 billion was sold in the five days ended Aug. 30, Bloomberg data show.

Investment Grade

Sales of investment-grade debentures reached at least $2.2 billion, compared with $14 billion last week and a 2013 weekly average of $22.8 billion. Offerings of speculative-grade bonds fell to $5.8 billion from $11 billion last week and a 2013 weekly average of $7.4 billion.

The extra yield investors demand to own U.S. corporate bonds rather than government debentures fell to the lowest since July 2007, narrowing to 191 basis points yesterday from 196 basis points on Dec. 13, according to the Bank of America Merrill Lynch U.S. Corporate & High Yield index. Yields decreased 1 basis point to 3.98 percent.

To contact the reporter on this story: Sarika Gangar in New York at sgangar@bloomberg.net

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


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