Company Credit-Default Swaps in U.S. Climb Before Fed Minutes

A gauge of corporate credit risk increased the most in almost three weeks as investors await Federal Reserve minutes for clues to U.S. monetary policy.

The Markit CDX North America Investment Grade Index, a credit-default swaps benchmark that investors use to hedge against losses on corporate debt or to speculate on creditworthiness, climbed 1.5 basis points to a mid-price of 100.2 basis points at 12:36 p.m. in New York, according to prices compiled by Bloomberg.

The swaps index rose before the Fed releases the minutes of its July 31 to Aug. 1 policy meeting today as investor concern increases that an economic slowdown will taint corporate balance sheets and undermine companies’ ability to repay debt. Chicago Fed President Charles Evans said a weakening in global trade is “awful.”

The index, which tends to rise as investor confidence deteriorates, fell to as low as 96.9 on Aug. 21, the lowest intraday level since May 4. It’s fallen from 117.3 basis points on July 25.

“We’ve had a nice sort of zero-resistance run for the last few weeks,” Noel Hebert, chief investment officer at Bethlehem, Pennsylvania-based Concannon Wealth Management LLC, which oversees about $250 million, said in a telephone interview. Investors are saying, “We’re getting back into that zone where people start coming back in from vacation and reinserting uncertainty into the landscape so why not just take a little bit off the table?” he said.

Swap Spread

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.

The U.S. two-year interest-rate swap spread, a measure of stress in credit markets, narrowed 1.12 basis point to 19.63 basis points. The measure, which falls when investors favor assets such as corporate bonds and rises when they seek the perceived safety of government securities, has declined from 54.7 in November.

The Markit iTraxx Europe Index of 125 companies with investment-grade ratings increased 4.6 basis points to 141.5 and the Markit iTraxx Crossover Index of credit-default swaps on 50 companies with mostly high-yield credit ratings added 13.2 basis points to 573.5, Bloomberg prices show.

To contact the reporters 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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