U.S. Company Credit-Default Swaps Rise on Global Growth Concern
A gauge of U.S corporate credit risk rose for the second time this week amid signs that policy makers may be slow to curb Europe’s debt crisis and to stimulate global economic growth.
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, surged 4.2 basis points to a mid-price of 102.6 basis points at 5:36 p.m. in New York, according to prices compiled by Bloomberg. Contracts tied to Ryder (R) System Inc. rose to the highest level in more than six weeks.
The swaps index climbed as Spain’s Deputy Prime Minister Soraya Saenz de Santamaria said the country needs to know how much debt the European Central Bank plans to purchase before deciding whether it needs assistance. At a bill auction in Madrid, the yield on three-month notes rose to 1.203 percent from 0.946 percent when those securities were last auctioned on Aug. 28.
Federal Reserve Bank of Philadelphia President Charles Plosser said the new bond-purchase plan announced by the Fed Sept. 13 is unlikely to boost growth or hiring. A slow response to the European debt crisis and weak U.S. economic growth could make it more difficult for companies to repay debts, increasing risks to bondholders.
“We had a nice rally leading up to quantitative easing and credit is arguably a big beneficiary of QE3,” Adam Richmond, the New York-based head of U.S. high-yield strategy at Morgan Stanley, said in reference to the swaps index. “But in the last week there’s been some profit taking and digesting the news that has made spreads widen.”
The swaps measure typically rises as investor confidence deteriorates and falls 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.
ArcelorMittal (MT), the world’s biggest steelmaker, sold $650 million of 8.75 percent, dollar-denominated subordinated perpetual securities, according to data compiled by Bloomberg.
The offering is the company’s first since being downgraded to junk on Aug. 2 by Standard & Poor’s, which cited uncertainty about ArcelorMittal’s debt-reduction plan and a weakening steel industry.
The average relative yield on investment-grade debt was unchanged today. The spread on speculative-grade debt increased 6 basis points, led by energy companies, which widened 9 basis points, according to data compiled by Bloomberg.
Default swaps tied to Miami, Florida-based Ryder rose 12.4 basis points to 170.3 basis points, the highest level since Aug. 13, according to data provider CMA, which is owned by McGraw- Hill Cos. and compiles prices quoted by dealers in the privately negotiated market. The contracts reached a 12-week low of 137.3 basis points on Sept. 12.
The risk premium on the Markit CDX North America High Yield Index rose 26 basis points to 497 basis points, the highest in two weeks. The gauge of speculative-grade 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.
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