Corporate Credit-Default Swaps in U.S. Increase for Second Day

A gauge of U.S. corporate credit risk increased for a second straight day as European leaders disagreed on how to resolve the sovereign-debt crisis.

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, added 2.1 basis points to a mid-price of 98.5 basis points at 5:29 p.m. in New York, according to prices compiled by Bloomberg. Swaps tied to Wells Fargo & Co. rose to the most in more than six weeks.

The index rose as Michael Meister, a senior ally of German Chancellor Angela Merkel, said today that Spain must be clear about its situation and decide whether it needs a full rescue. German business confidence unexpectedly dropped to the lowest in more than two and a half years in September, according to the Munich-based Ifo institute’s business climate index, threatening to pressure corporate balance sheets as the global recovery weakens.

“Our general sense is that there are continued concerns coming out of Europe,” Mark Pibl, head of credit strategy at New York-based Cortview Capital Securities LLC, said in a telephone interview. “So our view is decidedly more bearish,” he said. The biggest risk is “a slowing economy, which leads to higher risk premiums,” Pibl said.

New Issues

United Parcel Service Inc. (UPS) sold bonds for the first time in almost two years with a three-part offering to refinance $1.75 billion of maturing debt. The Atlanta-based company plans to use proceeds from the sale for general corporate purposes and to repay its 4.5 percent notes due in January, according to a regulatory filing today. UPS borrowed the money after yields on investment-grade debt fell to an unprecedented 2.92 percent last week, according to Bank of America Merrill Lynch index data.

ArcelorMittal (MT), the world’s biggest steelmaker, plans to sell dollar-denominated subordinated perpetual securities in its first debt offering since being downgraded to junk on Aug. 2 by Standard & Poor’s, which cited uncertainty about the company’s debt-reduction plan and a weakening steel industry. Yields on speculative-grade debt fell to 6.95 percent Sept. 19, the lowest on record.

The average relative yield on investment-grade debt was unchanged, while the spread on speculative-grade bonds increased by 6 basis points, led by those of energy companies, which widened 10 basis points, according to data compiled by Bloomberg.

Risk Premium

The risk premium on the Markit CDX North America High Yield Index rose 12.8 basis points to 470.7 basis points, climbing from a 14-month low on Sept. 14. The gauge of high-yield companies’ default risk will begin the switch to a new series on Sept. 27, replacing firms that no longer have appropriate credit grades or that aren’t among the most actively traded borrowers.

The swaps indexes typically rise as investor confidence deteriorates and fall as it improves. 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.

Credit-default swaps tied to Wells Fargo (WFC) increased 6.2 basis points to 89.7 basis points as of 3:30 p.m. in New York, according to data provider CMA, which is owned by McGraw-Hill Cos. and compiles prices quoted by dealers in the privately negotiated market. That’s the highest level since 90.2 basis points Aug. 8.

The U.S. two-year interest-rate swap spread, a measure of stress in credit markets, added 0.93 basis point to 13.81 basis points. The measure rises when investors seek the perceived safety of government securities and falls when they favor assets such as corporate bonds.

To contact the reporter on this story: Peter Rawlings in New York at prawlings@bloomberg.net

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

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