Company Credit-Default Swaps in U.S. Climb; Hess Risk Increases

A gauge of U.S. corporate credit risk rose as pending U.S. home sales declined in December for the first time in four months and before the Federal Reserve’s policy announcement later this week.

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, climbed 0.9 basis point to a mid-price of 85.8 basis points at 4:40 p.m. in New York, according to prices compiled by Bloomberg. The measure reached 84.9 on Jan. 25, the lowest since September.

Uneven progress in the housing recovery may stoke investor concern that an economic slowdown will impair companies’ ability to repay debt. The index of contracts for the purchase of previously owned homes fell 4.3 percent to 101.7, the National Association of Realtors reported today in Washington. The Federal Open Market Committee will issue its policy statement on Jan. 30 and is expected to keep the U.S. federal funds target unchanged at 0.25 percent, a Bloomberg survey projects.

“The market will be on hold until the Fed’s next FOMC decision on Wednesday,” Adrian Miller, director of fixed income strategy at New York-based GMP Securities LLC, said in a telephone interview. “The outcome could be significant and will have a noticeable impact on the corporate swaps.”

Hess Swaps

The credit-swaps index 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.

The cost of protecting Hess Corp’s (HES) debt from losses for five years rose after the energy company said it will sell its fuel storage terminal and exit the refining business. Default swaps on the company’s debt advanced 9 basis points to 144.5 basis points at 3:41 p.m. in New York, Bloomberg prices show.

The U.S. high-yield par default rate for 2012 was 1.9 percent, according to a report today by Fitch Ratings, lower than the 4.6 percent average from 1980 through 2012. The ratings company projects that default activity in 2013 will remain in line with 2012. The weighted average recovery rate for the 2012 defaults was at 50.2 percent, according to the analysts, led by Mariarosa Verde.

High Yield

The risk premium on the Markit CDX North American High Yield Index increased 3.2 basis points to 433.1 basis points, Bloomberg prices show.

The average relative yield on junk-rated debt dropped 1.5 basis points to 458 basis points, led by spreads on the bonds of technology companies, which fell by 3.9 basis points to 485 basis points, Bloomberg data show. High-yield, high-risk debt is rated below Baa3 by Moody’s Investors Service and lower than BBB- at Standard & Poor’s. A basis point is 0.01 percentage point.

To contact the reporter on this story: Madhura Karnik in New York at mkarnik@bloomberg.net

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