U.S. Corporate Swaps Increase as Credit Investors Turn Into `Oil Traders'
The cost of protecting corporate bonds from default in the U.S. reversed an earlier decline as the benchmark tracked oil’s rise above $100 a barrel.
The Markit CDX North America Investment Grade Index, which investors use to hedge against losses on corporate debt or to speculate on creditworthiness, rose 0.6 basis point to a mid- price of 85.2 basis points as of 2 p.m. in New York, according to index administrator Markit Group Ltd.
The credit swaps index is increasingly trading in lockstep with oil futures. A measure of correlation between crude futures in New York and the CDX, using 21 days of trading, reached 0.7, the highest on record, according to data compiled by Bloomberg. A correlation of 1, which gauges the percent change of the two contracts, would show the two assets are moving in lockstep, and a -1 reading reflects the opposite.
“We’re all basically oil traders right now,” said Rizwan Hussain, a New York-based credit strategist at Morgan Stanley.
The credit swaps index, which typically rises as investor confidence deteriorates and falls as it improves, has increased from 79 on Feb. 8. It gained for a second day even after ADP Employer Services said companies in the U.S. added 217,000 jobs last month, topping economists’ estimates and the Standard & Poor’s 500 Index rose 0.2 percent to 1,309.26.
Crude oil for April delivery climbed $2.64, or 2.7 percent, to $102.27 a barrel on the New York Mercantile Exchange as demonstrations in Iran stoked concern that the turmoil spreading across the Middle East may disrupt supplies from the Organization of Petroleum Exporting Countries’ second-largest producer.
Libyan Rebels
Saudi Arabia’s benchmark stock index plunged the most in two years yesterday on concern disturbances may extend to the kingdom, the biggest supplier in OPEC. Libyan rebels braced for renewed clashes with forces loyal to leader Muammar Qaddafi.
The CDX index earlier fell to as low as 83.4 basis points as Dominion Resources Inc., State Street Corp. and Old Republic International Corp. said they planned to offer at least $3.09 billion in debt today, following issuance in the U.S. of $11.3 billion in the first two days of this week. That followed $7.06 billion of sales last week, the least this year, according to data compiled by Bloomberg.
In testimony on monetary policy to the House Financial Services Committee, Federal Reserve Chairman Ben S. Bernanke didn’t rule out expanding the Fed’s U.S. debt purchases, so- called quantitative easing, aimed at spurring growth, saying he doesn’t want to see the economy relapse into recession.
‘Fed the Flames’
“If they have to consider a quantitative easing three, that means neither one nor two worked,” said Bonnie Baha, a money manager and head of the global developed-credit group at DoubleLine Capital LP.
The first rounds “fed the flames” for risk-taking, and a third could see investors jumping into high-yield bonds trading significantly above their call price, she said. “At what point does it stop and do people say this isn’t rational?”
Credit swaps 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.
To contact the reporter on this story: Mary Childs in New York at mchilds5@bloomberg.net
To contact the editor responsible for this story: Alan Goldstein at agoldstein5@bloomberg.net
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