Bloomberg News

U.S. Credit-Default Swaps Head for Biggest Decline Since October

February 28, 2014

A measure of U.S. corporate credit risk is heading for its biggest monthly drop since October as the Federal Reserve reassured investors that its monetary policy remains dependent on the economy’s progress.

The Markit CDX North American Investment Grade Index, a credit-default swaps benchmark used to hedge against losses or to speculate on creditworthiness, declined 8 basis points for the month to 63.4 basis points, after decreasing 0.3 basis point today as of 5:02 p.m. in New York, according to prices compiled by Bloomberg. That’s the steepest monthly decline since October when the gauge fell 9.1 basis points.

Investors pushed the index lower this month as turmoil in emerging markets eased, consumer confidence increased and Federal Reserve Chair Janet Yellen said yesterday that if there were a “significant change” in the economic outlook, the central bank might reconsider the strategy of gradually reducing its monthly bond purchases, signaling the Fed will continue to support the economy.

“She’s not coming in and trying to do something wildly different,” Matthew Duch, a fund manager who helps oversee $12 billion at Bethesda, Maryland-based Calvert Investments Inc., said in a telephone interview. “The transition should be rather smooth and has proven to be so.”

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.

Economic Growth

Federal Reserve Bank of Philadelphia President Charles Plosser, who votes on policy this year, said the Fed should press on with plans to trim its bond purchases with the economy likely to grow about 3 percent this year.

Gross domestic product grew at a 2.4 percent annualized rate from October through December, compared with an earlier estimate of a 3.2 percent gain, according to figures from the Commerce Department.

“I actually am optimistic about the longer-term growth of the economy,” Plosser said today in an interview on Bloomberg Television’s “Surveillance” with Tom Keene.

Consumer confidence in the U.S. improved in February from a month earlier as more consumers grew optimistic about the outlook for the economy. The Thomson Reuters/University of Michigan final index of sentiment rose to 81.6 this month from 81.2 in January. The median estimate in a Bloomberg survey of economists called for the measure to hold at its preliminary reading of 81.2.

Low Issuance

Corporate bond sales worldwide are wrapping up the slowest February since 2011, signaling that five years of Fed stimulus may have run its course after companies took advantage of record-low borrowing costs to refinance debt.

Cisco Systems Inc. (CSCO:US) and Goldman Sachs Group Inc. (GS:US) led $283.9 billion of offerings this month, the least since $282.6 billion in February 2011 and 23 percent below January, according to data compiled by Bloomberg.

The curbed issuance is boosting demand for bonds in the secondary market, driving up prices and narrowing the extra yield investors demand to own the securities instead of similar-maturity Treasuries, according to Barclays Plc strategists.

Cisco sold the year’s largest dollar-denominated offering (CSCO:US) on Feb. 24 with $8 billion of securities to help fund share repurchases. The deal was the largest since Verizon Communications Inc.’s record $49 billion offering in September, Bloomberg data show.

NII Holdings

NII Holdings Inc. (NIHD:US)’s $800 million of 10 percent senior unsecured notes due in August 2016 fell 12.5 cents to 44.3 cents on the dollar to yield 53.4 percent as of 4:03 p.m. in New York, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. That’s the lowest price since the notes were issued in 2010.

The wireless carrier said it will have to “significantly” improve its operating performance and consider additional options to increase liquidity to fund its business in 2015 and thereafter, according to a statement from the Reston, Virginia-based company.

The U.S. distress ratio declined to 5.1 percent in February from 5.2 percent in the prior month, according to Standard & Poor’s. The ratio “is now at the post crisis cycle low of 5.1 percent reached in May 2013,” Diane Vazza, head of S&P’s global fixed-income research, said today in a statement. Distressed bonds are those yielding at least 10 percentage points more than similar-maturity Treasuries.

The risk premium on the Markit CDX North American High Yield Index, tied to the debt of 100 speculative-grade companies, narrowed 38.2 basis points for the month to 312.1, after rising by 0.5 today, Bloomberg prices show. High-yield, high-risk bonds are rated below Baa3 by Moody’s Investors Service and less than BBB- at S&P. A basis point is 0.01 percentage point.

The extra yield investors demand to hold investment-grade corporate bonds rather than government debt fell 1 basis point for the day to 97.1, 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

  • CSCO
    (Cisco Systems Inc)
    • $24.97 USD
    • -0.23
    • -0.92%
  • GS
    (Goldman Sachs Group Inc/The)
    • $185.29 USD
    • -0.91
    • -0.49%
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