U.S. Corporate Credit Risk Climbs as Debt Ceiling Talks Drag On
A gauge of U.S. corporate credit risk rose for a fourth day this week as unresolved talks to increase the U.S. government’s debt cap outweighed better-than- estimated earnings from Citigroup Inc. (C)
The Markit CDX North America Investment Grade Index, which investors use to hedge against losses on corporate debt or to speculate on creditworthiness, gained 0.7 basis point to a mid- price of 97.3 basis points as of 12:49 p.m. in New York, according to index administrator Markit Group Ltd.
Negotiations to raise the U.S. government debt limit are stalling as House Speaker John Boehner, a Republican from Ohio, told reporters his party won’t allow tax increases in a deal that would include cutting the budget. The impasse overshadowed second-quarter profit for New York-based Citigroup that climbed to $3.34 billion, or $1.09 a share, which beat the 96 cent average estimate of 23 analysts surveyed by Bloomberg.
“Hopefully more will get resolved over the weekend as far as the budget situation here,” said Rich Gordon, a fixed-income market strategist at Wells Fargo & Co. in Chicago. “Absent bad news elsewhere, good news in earnings season could be a net positive for the markets.”
No global corporate bond issuers defaulted this week, leaving the tally for the year at 18, according to a report published today by Standard & Poor’s.
The credit swaps index, which typically rises when investor confidence deteriorates, has climbed 4.9 basis points this week, as Ireland’s debt ranking was cut to junk and government bond yields soared in Italy.
European Stress Tests
The European Banking Authority released the results of stress tests today that showed eight of 91 banks would have too little capital in the event of an economic slowdown. Most investors don’t give the tests “much credence” because they aren’t rigorous enough to “actually stress out credit,” Gordon said.
Clorox Co. (CLX) led companies whose perceived credit risk rose. Five-year default swaps on the Oakland, California-based company climbed 33.9 basis points to 143.4 at 12:31 p.m., according to data provider CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in privately negotiated markets. Billionaire investor Carl Icahn is offering to buy the bleach maker for about $10.2 billion.
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: Will Robinson in New York at wrobinson11@bloomberg.net
To contact the editor responsible for this story: Alan Goldstein at agoldstein5@bloomberg.net
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