Credit Swaps in U.S. Decline as Spain Pledges to Reduce Deficit

A gauge of U.S corporate credit risk dropped by the most in two weeks as Spain announced a fifth austerity package to reduce the country’s budget deficit.

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, fell 3.7 basis points to a mid-price of 98.6 basis points at 4:23 p.m. in New York, according to prices compiled by Bloomberg. Swaps tied to Hartford Financial Services Group Inc. dropped the most in more than six months.

The measure tightened as Spanish Prime Minister Mariano Rajoy’s nine-month-old government approved a new tax on lottery winnings and a reduction in ministries’ spending. The cuts may be a move to head off tougher conditions tied to a potential European bailout, as policy makers seek to stem the sovereign- debt crisis.

The market has been “seesawing, one day fear-on, the next day fear-off,” William Larkin, a fixed-income money manager at Cabot Money Management Inc. in Salem, Massachusetts, said in a telephone interview. “Economic recoveries always come quicker than you think,” he said, and with yields at all-time lows “that’s the most dangerous part of being a bond investor.”

The credit swaps index, which ushered in a new version Sept. 20, typically falls as investor confidence improves and rises as it deteriorates. 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.

Hartford Financial

Contracts tied to Hartford Financial fell 29.9 basis points to 165.1 basis points as of 4:30 p.m. in New York, the biggest drop since March 21, according to data provider CMA, which is owned by McGraw-Hill Cos. and compiles prices quoted by dealers in the privately negotiated market. The swaps reached a 14-month low of 160.2 basis points on Sept. 14.

Prudential Financial Inc. (PRU) agreed to buy a Hartford life- insurance business, Newark, New Jersey-based Prudential said today in a statement.

Sinclair Television Group Inc., a unit of Sinclair Broadcast Group Inc. (SBGI), sold $500 million of 6.125 percent, 10- year senior notes, the company’s first offering since March 2011, according to data compiled by Bloomberg. The bonds were priced to yield 449 basis points, or 4.49 percentage points, more than similiar-maturity Treasuries.

Proceeds will be used to fund Sinclair’s acquisition of Newport Television and to pay down existing debt, according to a person familiar with the offering, who asked not to be identified because terms aren’t set.

High Yield

The average relative yield on speculative-grade debt narrowed 2 basis points, led by the bonds of utility companies, which fell 7 basis points, Bloomberg data show. Consumer non- cyclical bonds widened 2 basis points.

The U.S. two-year interest-rate swap spread, a measure of stress in credit markets, declined 1.36 basis points to 14.72 basis points. The measure falls when investors favor assets such as corporate bonds and rises when they seek the perceived safety of government securities.

The number of global defaults in 2012 rose to 59, more than double the 29 defaults through Sept. 26 in 2011, according to a report from rating company Standard & Poor’s. U.S. corporations have accounted for 32 of this year’s defaults.

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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