U.S. Corporate Credit Swaps Decline; MGIC Investment Swaps Drop

A gauge of U.S. corporate credit risk fell to the lowest level in more than five months as service industries grew at the fastest pace in a year.

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, declined 1.5 basis points to a mid-price of 83.1 basis points, according to prices compiled by Bloomberg. That’s the lowest level since Sept. 14, when the measure reached 83.

Signs that the economy is strengthening may help to ease investor concern that companies’ ability to repay debt will be constrained. The Institute for Supply Management’s index of U.S. non-manufacturing businesses, which account for almost 90 percent of the economy, increased to 56 in February from 55.2 in January, the Tempe, Arizona-based group said today. That’s higher than a projection of 55 from economists surveyed by Bloomberg. Readings greater than 50 signal expansion.

“Spreads are tightening on the back of a stronger pace of recovery and outlook with better macro indicators like the ISM today,” Dorian Garay, a New York-based money manager for an investment-grade debt fund at ING Investment Management, said in a telephone interview. Corporate earnings are also expected to show a strong pick up, he said.

Corporate Profits

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.

The Dow Jones Industrial Average rose to its highest level ever, erasing losses from the financial crisis after a four-year rally fueled by the fastest profit growth since the 1990s and monetary stimulus from the Federal Reserve.

Profits (INDU) of companies in the Dow are projected by analysts to increase 9.2 percent this year. Profit from companies in the S&P 500 will exceed $120 a share by next year, twice the level in 2008, according to Wall Street estimates. That’s the biggest increase since the 142 percent gain amid the rally in technology stocks from 1993 to 1999.

The risk premium on the Markit CDX North American High Yield Index fell 4.6 basis points to 417.2 basis points, the lowest in almost two years, Bloomberg prices show.

MGIC Swaps

The cost to protect MGIC Investment Corp.’s (MTG) debt from default dropped to the lowest since May 2011 after the insurer said it is selling common stock and notes and may use funds to bolster its unprofitable unit backing home loans.

Five-year credit-default swaps on the company’s debt dropped 164.2 basis points to 457 basis points as of 5:07 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 average relative yield on speculative-grade, or junk- rated, debt fell 7.9 basis points to 496.8 basis points, data compiled by Bloomberg show.

High-yield, high-risk debt is rated below Baa3 by Moody’s Investors Service and less than BBB- at Standard & Poor’s.

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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