U.S. Credit Swaps Little Changed as Fed Stimulus Optimism Wavers

A benchmark gauge of U.S. corporate debt risk was little changed as data showed industrial production increased in July, adding to signs the economy is improving and damping speculation the Federal Reserve will act.

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, increased 0.3 basis point to a mid-price of 103.2 basis points at 5:22 p.m. in New York, according to prices compiled by Bloomberg. The gauge closed at a three-month low of 102.4 on Aug. 10. Contracts tied to Deere & Co. (DE) and Staples Inc. (SPLS) rose after the companies cut their full-year profit forecasts.

Investors are concerned that the U.S. economy, which hasn’t had an unemployment rate less than 8 percent for 42 months, will falter without new stimulus from the Fed, pressuring corporate cash flows and hindering companies’ ability to repay debt. Fed Chairman Ben S. Bernanke has said the central bank is willing to initiate new measures if economic conditions fail to improve.

“We’re currently waiting in line to get on a roller- coaster ride of a fourth quarter. That’s after the Fed and elections,” Brian Jacobsen, who helps oversee about $211 billion as chief portfolio strategist at Wells Fargo Advantage Funds in Menomonee Falls, Wisconsin, wrote in an e-mail. “It may pay to wait to see what Bernanke says” when he addresses economists and central bankers at the Kansas City Fed’s conference in Jackson Hole, Wyoming, on Aug. 31.

Industrial Production

Industrial production rose 0.6 percent in July, Federal Reserve data showed today in Washington, beating the 0.5 percent increase called for by economists in a Bloomberg News survey. Manufacturing rose 0.5 percent for a second month. The pickup in industrial production follows data yesterday that showed U.S. retail sales climbed the most last month since February.

Deere, the largest maker of farm equipment, today cut its full-year earnings forecast after global demand slowed and its fiscal third-quarter profit of $788 million, or $1.98 a share, missed estimates. Net income in the year ending Oct. 31 will be $3.1 billion, down from a projection of $3.35 billion in May, according to a statement from the company.

The cost to guard against losses on the debt of the Moline, Illinois-based company increased 2.7 basis points to a mid-price of 56.2 basis points, according to data provider CMA, which is owned by McGraw-Hill Cos. and compiles prices quoted by dealers in the privately negotiated market.

Credit-default swaps typically rise as investor confidence deteriorates and fall as it improves.

Staples Swaps

Contracts tied to Staples, the world’s largest office- supply retailer, jumped 93.9 basis points to a mid-price of 399.1 basis points, CMA data show.

Staples cut its annual sales and profit forecast as economic weakness in the U.S. and Europe depressed revenue in the fiscal second quarter, according to a statement from the Framingham, Massachusetts-based company.

The default premium on the Markit CDX North America High Yield Index, a measure of U.S. speculative-grade corporate debt risk, rose 4.1 basis points to a mid-price of 558 basis points, Bloomberg prices show.

In London, the Markit iTraxx Europe Index of 125 companies with investment-grade ratings increased 1.3 to 146.3.

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