Bloomberg News

Credit Swaps Hold Before Yellen Speech; Capital One Sells Bonds

February 10, 2014

A measure of U.S. corporate credit risk held at about a two-week low as investors prepare for Federal Reserve Chairman Janet Yellen to deliver testimony to Congress tomorrow. A unit of Capital One Financial Corp. (COF:US) issued $2 billion 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, increased 0.1 basis point to 67.7 basis points at 5:10 p.m. in New York, according to prices compiled by Bloomberg. The measure fell to 67.6 on Feb. 7, the lowest closing level since Jan. 22.

Investors are assessing the strength of the economic recovery to gauge how quickly the Federal Reserve will reduce stimulus that has boosted credit markets. U.S. employers added fewer jobs than forecast in January, while the unemployment rate unexpectedly dropped to 6.6 percent, the lowest level in more than five years, a Labor Department report on Feb. 7 showed.

“Volumes are quite low ahead of Yellen’s testimony this week,” Adrian Miller, director of fixed-income strategies at GMP Securities LLC in New York, said in a telephone interview. The central bank chairman’s appearance “is pretty much the primary focal point following Friday’s jobs number, which still remains open to debate as to good, bad, or otherwise.”

In her first testimony to Congress as Fed chairman, Yellen is scheduled to testify before the House Financial Services Committee tomorrow, and before the Senate Banking Committee on Feb. 13. She was sworn in as the central bank’s head on Feb. 3.

Fed Purchases

The credit-swaps measure 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 Fed slowed its monthly debt purchases to $65 billion over the past two months from 2013’s $85 billion, sticking to its plan for a gradual withdrawal as the economy progresses. The bond buying was designed to curb long-term borrowing costs and spur growth.

Capital One Bank, a unit (COF:US) of the fifth-biggest U.S. credit-card lender, issued $750 million of 1.2 percent, three-year notes to yield 58 basis points more than similar-maturity Treasuries and $1 billion of 2.25 percent, five-year bonds to yield 78 basis points more than benchmarks, according to data compiled by Bloomberg.

The bank also sold $250 million of three-year, floating-rate securities to yield 50 basis points more than the three-month London interbank offered rate, Bloomberg data show. The debt may be rated A3 by Moody’s Investors Service, the data show.

McDonald’s Risk

The cost to protect the debt of McDonald’s Corp. (MCD:US) for five years rose 6 basis points to 19 basis points as of 4:09 p.m. in New York, according to data provider CMA, which is owned by McGraw Hill Financial Inc. and compiles prices quoted by dealers in the privately negotiated market. That’s the highest level since Jan. 29.

The world’s largest restaurant chain said sales at its established U.S. stores fell for the third straight month as severe weather and waning consumer confidence kept diners at home.

The risk premium on the Markit CDX North American High Yield Index, tied to the debt of 100 speculative-grade companies, was little changed at 331.4, 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 was little changed at 113.8, 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

  • COF
    (Capital One Financial Corp)
    • $81.69 USD
    • 0.77
    • 0.94%
  • MCD
    (McDonald's Corp)
    • $94.53 USD
    • 0.34
    • 0.36%
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