Bloomberg News

Credit Swaps in U.S. Fall as Economy Grows; Verizon Plans Bonds

January 30, 2014

A measure of U.S. corporate credit risk declined as data showed the economy expanded at a 3.2 percent pace in the fourth quarter and Americans’ spending climbed. Verizon Communications Inc. (VZ:US) plans to sell $500 million of bonds.

The Markit CDX North American Investment Grade Index, a credit-default swaps benchmark used to hedge against losses or to speculate on creditworthiness, decreased 0.7 basis point to 71.7 basis points at 5:08 p.m. in New York, according to prices compiled by Bloomberg. The gauge has fallen from a two-month high of 72.9 basis points on Jan. 24.

The annualized gain in gross domestic product matched the median forecast in a Bloomberg survey, Commerce Department figures showed today in Washington. Consumer spending, which accounts for almost 70 percent of the economy, increased 3.3 percent, the biggest rise in three years, bolstering investor confidence in companies’ ability to repay obligations.

The GDP report “was actually a little bit soft, with inventories going up, but not a bad number relative to expectations,” Kathy Jones, a fixed-income strategist at Charles Schwab & Co. in New York, said in a telephone interview. “It certainly justified the Fed’s decision to continue tapering.”

The Federal Reserve said yesterday it will stick to its plan for a gradual withdrawal from departing Chairman Ben S. Bernanke’s unprecedented easing policy. It cut monthly bond purchases to $65 billion from $75 billion.

The central bank has undertaken three rounds of bond buying since 2008 under the quantitative-easing stimulus strategy, swelling its balance sheet to a record $4.1 trillion.

Commercial Paper

The credit swaps measure 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.

The seasonally adjusted amount of U.S. commercial paper decreased $4.5 billion to $1.014 trillion outstanding in the week ended yesterday, the third straight drop, the Fed said today on its website. That’s the lowest level since the market touched $1.004 trillion in the period ended Aug. 14.

Commercial paper sold by non-U.S. financial institutions fell for a third week, decreasing $3.7 billion to $252.3 billion outstanding, the lowest level since the period ended July 31.

Verizon Offering

Verizon, owner of the biggest U.S. wireless network, may issue 40-year securities to yield 5.9 percent in an offering double the size of the $250 million initially marketed, according to a person with knowledge of the transaction.

Proceeds may be used for general corporate purposes and the securities may be rated Baa1 by Moody’s Investors Service, said the person who asked not to be identified citing lack of authorization to speak publicly.

The risk premium on the Markit CDX North American High Yield Index, tied to the debt of 100 speculative-grade companies, narrowed 4.6 basis points to 349.2, Bloomberg prices show. High-yield, high-risk bonds are rated below Baa3 by Moody’s and less than BBB- at Standard & Poor’s. A basis point is 0.01 percentage point.

The extra yield investors demand to hold investment-grade corporate bonds rather than government debt fell 0.4 basis point to 112.3, Bloomberg data show.

To contact the reporter on this story: Jessica Summers in New York at jsummers20@bloomberg.net

To contact the editor responsible for this story: Shannon D. Harrington at sharrington6@bloomberg.net


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Companies Mentioned

  • VZ
    (Verizon Communications Inc)
    • $50.91 USD
    • -0.07
    • -0.14%
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