A gauge of U.S. corporate credit risk rose amid debate on when the Federal Reserve will reduce its unprecedented stimulus efforts. Duke Energy Corp. (DUK) sold $500 million of debt.
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, increased 2.8 basis points to a mid-price of 83.8 basis points at 5:01 p.m. in New York, according to prices compiled by Bloomberg. The index added 1.9 basis points last week.
Investors are looking for signs of when the Fed might start to scale back its $85 billion in monthly bond buying, a measure known as quantitative easing that has buoyed fixed-income securities. The policy-setting Federal Open Market Committee meets next week.
“If we look at the high-grade corporates, there is fear that the Fed will begin to remove their easy-money policies and engage in a tightening mode,” William Larkin, a fixed-income money manager who helps oversee $500 million at Cabot Money Management Inc. in Salem, Massachusetts, said in a telephone interview. “Once you start to really lose money, people start to panic.”
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.
U.S. company bonds lost 1.92 percent in May, the worst monthly performance since November 2011, according to the Bank of America Merrill Lynch U.S. Corporate & High Yield index. U.S. investment-grade bonds lost 2.28 percent, their biggest decline since October 2008, according to an index of that debt.
Inflation below the central bank’s 2 percent target warrants prolonging the “aggressive” use of bond buying to spur growth and bring down unemployment, St. Louis Fed President James Bullard said in remarks prepared for a panel discussion today in Montreal. San Francisco Fed President John Williams said last week a “modest adjustment downward” in the buying is possible as “early as this summer.”
The risk premium on the Markit CDX North American High Yield Index increased 21.6 basis points to 425.3 basis points, Bloomberg prices show. The 30-year Treasury yield increased three basis points, or 0.03 percentage point, to 3.36 percent at 4:02 p.m. New York time, according to Bloomberg Bond Trader prices. It earlier touched 3.38 percent, the highest since April 2012.
“The Fed’s policies are driving everything right now,” Larkin said. “They’re signaling to us to get ready, we just don’t know what the timing is.”
Duke Energy’s 2.1 percent, five-year bonds will be used to repay the largest U.S. utility owner’s $250 million of 5.65 percent debentures due June 15, according to a regulatory filing. Remaining proceeds will fund general corporate purposes, including the repayment of Duke Energy’s $496 million of net commercial paper outstanding, the filing shows.
The notes may be rated Baa2 by Moody’s Investors Service, according to data compiled by Bloomberg. Goldman Sachs Group Inc., Mizuho Financial Group Inc. (8411) and Royal Bank of Canada managed the offering, the filing shows.
The speculative-grade default rate in the U.S. fell to 2.9 percent in May from 3.1 percent the month before, a Moody’s report showed today. The New York-based ratings company said it expects the figure to fall to 2.4 percent by the end of the year. That would be the lowest level since February 2012, according to Moody’s data.
The average relative yield on speculative-grade, or junk-rated, debt tightened 1.1 basis points to 533.5 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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