A gauge of U.S. corporate credit risk fell after a report showed that the pace of U.S. housing starts unexpectedly climbed in October to a four-year high.
The Markit CDX North America Investment Grade Index, a credit-default swaps benchmark that investors use to hedge against losses or to speculate on creditworthiness, declined 1.6 basis points to a mid-price of 101.5 basis points at 5:12 p.m. in New York, according to prices compiled by Bloomberg.
Stronger-than-expected economic data may allay investor concern that the recovery will falter and hinder companies’ ability to repay debt. Beginning home construction increased to an 894,000 annual rate in October, up from a revised 863,000 pace in September, Commerce Department figures showed today in Washington. Economists’ median estimate in a Bloomberg survey called for starts to slip to 840,000.
“Housing has definitely in the last three months been one of the growth engines,” Mark Pibl, head of credit strategy at New York-based Cortview Capital Securities LLC, said in a telephone interview. A continuation of yesterday’s rally has outweighed “idiosyncratic risk stories” such as those of Hewlett-Packard Co. and Best Buy Co., he said.
Contracts protecting the debt of Hewlett-Packard jumped to the highest on record after the company reported an $8.8 billion impairment charge. Best Buy (BBY:US) posted a $10 million fiscal third- quarter net loss as sales at established stores fell more than expected.
The credit-swaps index, which typically falls as investor confidence improves and rises as it deteriorates, dropped the most in almost a year yesterday as President Barack Obama expressed confidence that he will agree on a budget compromise with Congress. 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.
An agreement on ways to reduce long-term federal budget deficits could remove an impediment to growth, said Federal Reserve Chairman Ben S. Bernanke in remarks to the Economic Club of New York. Failure to avoid the so-called fiscal cliff of $607 billion in spending cuts and tax increases set to take effect next year would pose a “substantial threat” to the recovery, Bernanke said.
Baidu Inc. (BIDU:US), the owner of China’s most-popular search engine, issued $1.5 billion of dollar-denominated bonds in its debut offering. The company sold $750 million each of 2.25 percent, five-year notes to yield 160 basis points more than similar-maturity Treasuries and 3.5 percent, 10-year notes at a relative yield of 185 basis points, according to data compiled by Bloomberg.
The average relative yield on speculative-grade debt narrowed 8 basis points to 5.93 percentage points, led by spreads on the bonds of utility companies, which dropped 29 basis points to 13.11 percentage points, according to data compiled by Bloomberg. A basis point is 0.01 percentage point.
The risk premium on the Markit CDX North America High Yield Index, a gauge of U.S. speculative-grade corporate debt risk, declined 11.3 basis points to 523.1 basis points, Bloomberg data show.
The U.S. two-year interest-rate swap spread, a measure of stress in credit markets, decreased 0.72 basis point to 12.25 basis points, according to Bloomberg prices. The spread typically narrows when investors favor assets such as corporate bonds and widens when they seek the perceived safety of government securities.
Credit swaps protecting the debt of Hewlett-Packard (HPQ:US) surged 28.7 basis points to 374.2 basis points, poised for the highest level on record, as of 3:30 p.m. in New York, according to data provider CMA, which is owned by McGraw-Hill Cos. and compiles prices quoted by dealers in the privately negotiated market.
The world’s largest computer maker reported fourth-quarter results that included an $8.8 billion impairment charge linked to the 2011 acquisition of Autonomy Corp. The Palo Alto, California-based company said most of the charge is linked to “serious accounting improprieties, disclosure failures and outright misrepresentations at Autonomy.”
Contracts tied to Best Buy rose 3.3 percentage points to 21.8 percent upfront, according to CMA, after reporting same- store sales fell 4.3 percent last quarter, more than the 3.3 percent drop estimated by analysts. The upfront price is in addition to 5 percent a year, meaning it would cost $2.18 million initially and $500,000 annually to protect $10 million of the company’s debt.
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