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Corporate Credit Swaps in U.S. Decline; Constellation Risk Rises

A gauge of U.S. corporate credit risk decreased for the first time this week after consumer spending in the U.S. climbed in December as incomes grew by the most in eight years.

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, fell 1.4 basis points to a mid-price of 88.9 basis points at 4:17 p.m. in New York, according to prices compiled by Bloomberg. The measure declined from the highest level since Dec. 31 after ending last week at 84.9, a four-month low.

Signs that the economy is strengthening may ease investor concern that companies’ will struggle to repay debt. Household purchases, which account for about 70 percent of the economy, rose 0.2 percent after a 0.4 percent gain the prior month, a Commerce Department report showed today in Washington. Disposable income, or the money left over after taxes, climbed 2.8 percent after adjusting for inflation, the biggest gains since May 2008.

“The tightening is almost entirely due to today’s economic data,” Michael Kraft, senior portfolio manager at the New York- based Vanderbilt Avenue Asset Management, said in a telephone interview. “Demand for corporate credit continues as this economy improves.”

The Labor Department reported in Washington today that initial jobless claims rose 38,000 in the week ended Jan. 26, the most since Nov. 10, to 368,000. A release of payrolls data tomorrow may report a 165,000 increase in January employment after a 155,000 rise a month earlier, according to the Bloomberg survey median.

Constellation Swaps

The cost of protecting Constellation Brands Inc.’s (STZ) debt from losses increased after the U.S. sued to block Anheuser- Busch InBev NV’s proposed purchase of the half of Grupo Modelo SAB it doesn’t already own. Constellation, the world’s largest wine seller, agreed to buy Crown Imports in a joint venture with Grupo Modelo. The company said it was “disappointed” by the suit and it’s looking forward to a expeditious resolution.

Five-year default swaps on the company’s debt increased 13.5 basis points to 202.5 basis points at 2:52 p.m. in New York, according to data provider CMA, which is owned by McGraw- Hill Cos. and compiles prices quoted by dealers in the privately negotiated market.

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.

Bond Sales

Sales of corporate bonds from the U.S. to Europe and Asia are accelerating, marking their busiest January ever following unprecedented issuance in 2012. Companies raised $412.3 billion of bonds this month, surpassing the $407.2 billion sold in January 2009.

The risk premium on the Markit CDX North American High Yield Index decreased 4 basis points to 446.1 basis points, Bloomberg prices show.

The average relative yield on junk-rated debt rose 7.9 basis points to 471.8 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

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