U.S. Swaps Erase Drop as Fed’s Williams Says Stimulus May Slow
A gauge of U.S. corporate credit risk erased an earlier decline after Federal Reserve Bank of San Francisco President John Williams said the central bank may start tapering its bond purchases as soon as this summer.
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, rose 0.1 basis point to a mid-price of 71.6 basis points at 4:32 p.m. in New York, according to prices compiled by Bloomberg. The measure, which typically rises as investor confidence deteriorates and falls as it improves, had earlier declined as much as 1.6 basis points.
Williams said the Fed may slow the pace of its $85 billion in monthly bond-buying amid signs the economy is gradually gaining strength, even as data today signaled some weakness in new home starts and jobless claims. It is “clear that the labor market has improved since September,” when the Fed began its third round of asset purchases, Williams said in a speech in Portland, Oregon. “We could reduce somewhat the pace of our securities purchases, perhaps as early as this summer” and end the program late this year, he said.
“His aggressive timeline in the face of questionable data certainly shook up the markets,” Adrian Miller, director of fixed-income strategy at GMP Securities LLC, said in a telephone interview from New York. “You can pick an asset class and everything turned because of this fear of premature punchbowl withdrawal.”
Jobless claims jumped by 32,000 to 360,000 in the week ended May 11, exceeding all estimates in a Bloomberg survey of economists, while new home starts slumped 16.5 percent, the most since February 2011, to an 853,000 annualized rate.
The risk premium on the Markit CDX North American High Yield Index rose 0.5 basis point to 348.6 basis points after dropping as much as 7.3 basis points, Bloomberg prices show.
Moody’s liquidity-stress index stayed near a record low this month, rising to 3.2 percent through mid-May from a record low of 2.8 percent at the end of April, according to a report yesterday from Moody’s Investors Service.
The gauge, which rises as companies find financing more difficult to obtain and falls as their ability to manage cash needs improves, has averaged 7.3 percent since 2002.
“Most U.S. speculative-grade companies are avoiding liquidity problems despite tepid growth in corporate sales and continued softness in the economy,” analysts at Moody’s led by John Puchalla wrote in a report yesterday about the liquidity-stress index.
The cost to protect against a default by Hess Corp. (HES) fell the most in five years as the oil company reached an agreement with billionaire Paul Singer’s Elliott Management Corp. to end a four-month proxy battle.
Five-year credit swaps tied to Hess debt decreased 30.9 basis points to a mid-price of 116.5 basis points by 4:31 p.m., according to Bloomberg prices.
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.
Hess added three of five board members nominated by the activist shareholder, and in exchange, Elliott will support the New York-based company’s five nominees to the board, according to a statement. With departures, Hess will change nine people on its 14-member board.
“For bondholders, we think this compromise is a better near-term result than an outright victory by Elliott, but the risk persists that more radical business transformation will be entertained and/or more aggressive financial policies will be employed,” Philip Adams, a senior bond analyst at Gimme Credit LLC in Chicago, wrote in a note today.
The average relative yield on speculative-grade, or junk-rated, debt widened 3.4 basis points to 488.4 basis points, Bloomberg data show. High-yield, high-risk debt is rated below Baa3 by Moody’s and less than BBB- at Standard & Poor’s.
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