Credit Swaps in U.S. Fall on Budget Optimism; Costco Sells Bonds

A gauge of U.S. corporate credit risk declined after comments by Speaker of the House John Boehner and President Barack Obama fueled optimism a compromise can be reached to avert the so-called fiscal cliff.

The Markit CDX North American Investment Grade Index, a credit-default swaps benchmark that investors use to hedge against losses or to speculate on creditworthiness, dropped 1.2 basis points to a mid-price of 101 basis points at 4:31 p.m. in New York, according to prices compiled by Bloomberg. The measure reached as high as 105.1 basis points earlier today.

Signs that lawmakers will reach a compromise to avert the $607 billion in spending cuts and tax increases set to take effect next year may allay investor concern that an economic slowdown will hinder companies’ ability to repay debt. Boehner, an Ohio Republican, said he is optimistic lawmakers engaged in budget talks can “avert this crisis sooner rather than later.” Obama said separately at the White House that he hopes a deal can be reached before Christmas.

“You can define the inflection points in the market right now” by lawmakers’ public comments on budget negotiations, Noel Hebert, who oversees about $250 million as chief investment officer at Bethlehem, Pennsylvania-based Concannon Wealth Management LLC, said in a telephone interview. “If they sound positive, people react positively.”

Obama is scheduled to meet with business leaders today, including Goldman Sachs Group Inc. (GS) Chief Executive Officer Lloyd Blankfein.

Home Sales

Purchases of new homes unexpectedly declined in October, showing limited progress in the housing market recovery. Sales dropped 0.3 percent to a 368,000 annual pace following a revised 369,000 rate in September that was weaker than initially reported, figures from the Commerce Department showed today in Washington.

The credit-swaps index 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.

Costco Wholesale Corp. (COST), the largest U.S. warehouse-club chain, issued $3.5 billion of debt in three parts, its first offering since February 2007, as the company prepares to pay a special dividend of about $3 billion to shareholders. Costco sold $1.2 billion of three-year securities, $1.1 billion of five-year bonds, and $1.2 billion of debt maturing in 2019, according to data compiled by Bloomberg.

Hewlett-Packard

The average relative yield on speculative-grade debt narrowed 1 basis point to 5.86 percentage points, led by spreads on the bonds of utility companies, which dropped 6 basis points to 13.28 percentage points, according to Bloomberg data.

The risk premium on the Markit CDX North American High Yield Index, a measure of U.S. speculative-grade corporate debt risk, dropped 6.7 basis points to 509.5 basis points, according to prices compiled by Bloomberg.

Bonds of Hewlett-Packard Co. (HPQ) fell after Moody’s Investors Service reduced its credit rating. The company’s $750 million of 5.5 percent notes due March 2018 dropped 0.2 cent to 105.9 cents on the dollar, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.

Hewlett-Packard had its credit rating cut by Moody’s, which cited concern about the computer maker’s ability to contend with competition and “execution challenges.” Moody’s reduced Hewlett-Packard’s long-term credit rating to Baa1, three levels above junk, from A3, according to a statement today. Its outlook is negative.

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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