Credit Swaps in U.S. Fall as Investors Seek Out Higher Yields

A gauge of U.S. company debt risk fell for the first time in three trading days as investors look for higher risk, higher yielding assets amid lending rates that reached record lows last week.

The Markit CDX North America Investment Grade Index, a credit-default swaps benchmark used to hedge against losses on corporate debt or to speculate on creditworthiness, fell 1.6 basis points to a mid-price of 111 basis points at 4:59 p.m. in New York, according to prices compiled by Bloomberg. Contracts tied to Alcoa Inc. (AA) increased as the New York-based company posted a second-quarter loss.

Credit-market investors are seeking higher returns to counter record-low bond yields, even as forecasts indicate that growth in the U.S. could be flagging, according to Anthony Valeri, a market strategist in San Diego at LPL Financial. Analyst estimates compiled by Bloomberg call for a 1.8 percent decline in profit for companies in the Standard & Poor’s 500 Index in the second quarter.

“The credit markets still have some bad news priced in,” Valeri, whose firm oversees about $330 billion, said in a telephone interview. “To have material weakness from here, we’d need to have some sign that we are returning to a recession and that’s not yet evident.”

Alcoa, the largest U.S. aluminum producer, reported a $2 million net loss for the second-quarter, compared with net income of $322 million a year earlier. Profit excluding a charge related to a proposed lawsuit settlement and other items was 6 cents a share, compared with the 5-cent profit that was the average of 19 estimates compiled by Bloomberg.

Alcoa Earnings

The cost to guard against losses on the debt of Alcoa increased as much as 6.6 basis points, before paring gains. Credit-default swaps on Alcoa rose 3.6 basis points to a mid- price of 371.1 basis points at 5:19 p.m. in New York, Bloomberg prices show. Alcoa reported its results after the close of the stock market.

Yields on U.S. investment-grade company bonds slid to a record low 3.256 percent on July 6, according to Bank of America Merrill Lynch index data. That’s the lowest level in data extending back to 1986. The Federal Reserve decided June 20 to extend its program to lower borrowing costs by replacing short- term bonds with longer-maturity debt, known as Operation Twist.

“People are looking for risk,” Peter Tchir, founder of New York-based macro advisory firm TF Market Advisors, said in a telephone interview. “As a whole, slow growth isn’t horrible for fixed-income investors and it’s pretty clear that the Fed is on hold as well so we’re not going to see rising treasury rates any time soon, which again I think is giving people comfort to buy investment-grade bonds and high-yield bonds.”

The swaps gauge typically falls as investor confidence improves and rises as it deteriorates. 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: Brooke Sutherland in New York at bsutherland7@bloomberg.net

To contact the editor responsible for this story: Alan Goldstein at agoldstein5@bloomberg.net

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