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Credit Swaps in U.S. Decline; Toyota Sells $1.5 Billion of Bonds

January 07, 2013

A gauge of U.S. corporate credit risk fell to the lowest level in almost four months as investors awaited the start of the fourth-quarter earnings season tomorrow.

The Markit CDX North American Investment Grade Index, a credit-default swaps benchmark that investors use to hedge against losses or to speculate on creditworthiness, decreased 0.6 basis point to a mid-price of 84.9 basis points at 4:25 p.m. in New York, according to prices compiled by Bloomberg. That’s the lowest level on a closing basis since Sept. 14.

Last week, the index fell 13.9 basis points, the biggest decline since the period ended Dec. 2, 2011, as lawmakers passed a budget deal averting the so-called fiscal cliff that the Congressional Budget Office said may have tipped the economy into recession, easing concern that an economic slowdown will hinder companies’ ability to repay debt. Alcoa Inc. (AA:US) is scheduled to become the first member of the Dow Jones Industrial Average to release fourth-quarter results when the largest U.S. aluminum producer reports after the close of trading tomorrow.

Risk aversion “has come down tied to economic hopefulness and the fiscal cliff,” Adrian Miller, director of fixed-income strategies at GMP Securities LLC in New York, said in a telephone interview. According to Miller, investors aren’t expecting “anything dramatic” from corporate earnings. “I think the market has come to grips with the fact that 2013 earnings will be average at best,” he said.

Analysts are predicting about 1.2 percent growth in first- quarter earnings per share for companies in the Standard & Poor’s 500 Index, after rising a forecast 2.9 percent in the fourth quarter, data compiled by Bloomberg show.

Toyota Offering

The credit-swaps index had its biggest one-day decline since November 2011 on Jan. 2 after U.S. lawmakers passed a budget deal averting tax increases for most wage earners. The unemployment rate held at 7.8 percent, matching the lowest since December 2008, Labor Department figures showed on Jan. 4.

The swaps index 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.

Toyota Motor Corp. (7203), Japan’s largest manufacturer, sold $1.5 billion of bonds in a two-part offering. The maker of the Prius and Corolla automobiles sold $800 million of 1.375 percent, five-year notes to yield 60 basis points more than similar- maturity Treasuries and $700 million of 2.625 percent, 10-year debt at a relative yield of 80 basis points, according to data compiled by Bloomberg.

Investment Grade

The average relative yield for investment-grade bonds is trading 15 basis points wider than the average cost to protect the debt with credit-default swaps, JPMorgan Chase & Co. strategists led by Peter Acciavatti wrote in a Jan. 4 note to clients.

The risk premium on the Markit CDX North American High Yield Index fell 1.8 basis points to 440.5 basis points, Bloomberg prices show.

Credit swaps protecting against losses on the debt of Bank of America Corp. (BAC:US) fell 7.7 basis points to 109.5 basis points 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.

Bank of America agreed to an $11.7 billion package designed to resolve most disputes with U.S.-owned Fannie Mae about bad mortgages after a deal announced two years ago proved inadequate. Even after the costs related to the package and an additional $2.5 billion for expenses that include litigation and a separate regulatory settlement, the Charlotte, North Carolina- based lender said the fourth quarter was “modestly” profitable.

To contact the reporter on this story: Julia Leite in New York at

To contact the editor responsible for this story: Alan Goldstein at

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