U.S. Corporate Credit Swaps Fall as ECB Reports Loan Repayments
A gauge of U.S. corporate credit risk declined to the lowest in about four months after the European Central Bank said lenders will repay more loans than forecast and as earnings in the U.S. beat estimates.
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, decreased 1.7 basis points to a mid-price of 84.9 basis points at 5:05 p.m. in New York, according to prices compiled by Bloomberg. That’s the lowest since Sept. 14, when the measure reached 83.1.
“There was a little bit of this positive news out of the European banking system,” David Brown, a portfolio manager who helps oversee $96 billion of fixed-income assets at Neuberger Berman in Chicago, said in a telephone interview. “People continue to reduce that tail risk.”
Indications that the euro region’s debt crisis is abating may reduce investor concern that the turmoil will infect balance sheets and hamper companies’ ability to repay obligations. Financial institutions will return 137.2 billion euros ($184.4 billion) on Jan. 30, the first opportunity for early repayment of the initial three-year loan, the Frankfurt-based ECB said in a statement today. That compares with the median forecast of 84 billion euros in a Bloomberg News survey of economists.
Procter & Gamble Co. (PG), the world’s largest consumer-products maker, said net income more than doubled to $4.06 billion, or $1.39 a share, in its second quarter, which ended Dec. 31, from $1.69 billion, or 57 cents, a year earlier. Analysts projected $1.11, the average of 22 estimates compiled by Bloomberg.
The credit-swaps index typically falls as investor confidence 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.
Investor anxiety dropped this month with Standard & Poor’s so-called distress ratio decreasing to 8.1 percent as of Jan. 15, from 9.7 percent in December as spreads eased, the ratings company said in a statement. The ratio is a measure of the number of distressed securities, those yielding at least 10 percentage points more than similar-maturity Treasuries, divided by the total number of speculative-grade issues.
While relative yields on high-grade corporate debt have tightened this month, the sector’s been outpaced by other asset classes amid low issuance as companies report earnings, Brown said.
The S&P 500 Index (SPX), a benchmark for U.S. stocks, has climbed more than 5 percent this year, while the extra yield investors demand to hold investment-grade bonds instead of similar maturity government debt narrowed six basis points to 147 basis points yesterday, or 1.47 percent, Bank of America Merrill Lynch Index data show.
“The equity markets have had a nice run, other risky assets have had a nice run, and investment-grade credit has not done a heck of a lot over this month,” Brown said. “There was maybe a little room for a catch-up.”
The risk premium on the Markit CDX North American High Yield Index fell 5.7 basis points to 430.6 basis points, Bloomberg prices show. The average relative yield on junk-rated debt tightened 8 basis points to 4.61 percentage points.
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