Bloomberg News

U.S. Bank Swaps Jump Most in a Month as Russia Moves on Ukraine

March 03, 2014

The cost to protect against losses on the bonds of the biggest U.S. banks climbed the most in a month after Russia seized control of Ukraine’s Black Sea region of Crimea.

The average price of credit-default swaps of the six largest banks rose 2.2 basis points to 74.1 basis points as of 4:10 p.m. in New York, according to prices compiled by Bloomberg. That’s the biggest increase since Feb. 3.

Investors sought protection as Ukraine mobilized its army and called for foreign observers after Russian President Vladimir Putin got approval to use military force in Ukraine last week. The contracts on banks from Goldman Sachs Group Inc. to JPMorgan Chase & Co. reacted to market uncertainty as interest-rate swap spreads, a measure of debt-market stress, rose to the highest level in more than a month.

“Financial institutions are usually regarded as being the most interconnected to global markets,” Scott MacDonald, head of research at Stamford, Connecticut-based MC Asset Management Holdings LLC, said in a telephone interview. “What happened over the course of the weekend and last week has obviously filtered huge into the market.”

The U.S. two-year swap spread added 0.81 basis point to 14.06 basis points, and was poised for the highest closing level since Jan. 28. The gauge typically widens when investors seek the perceived safety of government debt and narrows when they favor assets such as corporate bonds.

‘Russian Aggressions’

The Markit CDX North American Investment Grade Index, a credit-default swaps benchmark used to hedge against losses or to speculate on creditworthiness, climbed 1.9 basis points to 65.3 basis points as of 4:47 p.m. in New York, according to prices compiled by Bloomberg. The measure was headed for the highest closing level since Feb. 19, while remaining below this year’s high of 74.5 reached on Feb. 3.

The swaps gauge 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.

“Credit investors are not very worried at all about the situation,” Brian Reynolds, chief market strategist for brokerage firm Rosenblatt Securities Inc. in New York, said in a telephone interview. “They believe that this is not going to lead to a shooting war, that it will turn out like all the other Russian aggressions in recent years.”

Daimler Offering

Daimler Finance North America LLC, a unit of Daimler AG (DAI), sold $650 million of 2.875 percent, seven-year securities to yield 83 basis points more than similar-maturity Treasuries and $700 million of three-year, floating-rate notes to yield 35 basis points more than the three-month London interbank offered rate, according to data compiled by Bloomberg.

The unit of the world’s biggest commercial-vehicle manufacturer, which last issued dollar-denominated bonds in July, also offered $800 million of 1.125 percent, three-year notes to yield 50 basis points more than benchmarks, Bloomberg data show. The securities may be rated A3 by Moody’s Investors Service.

A unit of HCA Holdings Inc. (HCA:US), the largest for-profit hospital chain, sold $2 billion of 5 percent, 10-year notes to yield 240 basis points more than similar-maturity Treasuries and $1.5 billion of 3.75 percent, five-year debt to yield 229 basis points more than benchmarks, according to data compiled by Bloomberg. The securities are rated Ba3 by Moody’s.

Proceeds may be used to redeem $1.5 billion of 8.5 percent securities maturing in 2019 and $1.25 billion of 7.875 percent debt maturing in 2020, the Nashville, Tennessee-based company said in a statement.

Default Rate

The global speculative-grade default rate as measured by Moody’s ended 2013 at 2.9 percent and will finish this year at 2.2 percent, below the long-term average of 4.7 percent since 1983, according to a report from the ratings company.

“Looking ahead, we expect a somewhat lower corporate default rate in 2014 mainly given our expectations for relatively more robust economic growth,” Albert Metz, managing director of credit policy research at Moody’s, said.

The risk premium on the Markit CDX North American High Yield Index, tied to the debt of 100 speculative-grade companies, widened 11 basis points to 322.7, Bloomberg prices show. Speculative-grade 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 rose 0.6 basis point to 97.7, 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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