A gauge of U.S. corporate credit risk declined the most in more than a week as Alcoa Inc. (AA) started the second-quarter season by beating analysts’ estimates. Duke Energy Indiana issued $500 million in bonds in two-parts.
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, decreased 3.9 basis points to a mid-price of 82.7 basis points at 5:20 p.m. in New York, according to prices compiled by Bloomberg. That’s the biggest daily drop since falling 4.3 basis points on June 26.
Investors will look to companies’ earnings to assess their ability to repay debt obligations. Alcoa, the largest U.S. aluminum producer, reported earnings of 7 cents per share, beating analysts estimates. Earnings at companies listed on the Standard & Poor’s 500 Index rose 1.8 percent last quarter, down from a projection of 8.7 percent six months ago, according to more than 11,000 analyst estimates compiled by Bloomberg.
“We’ve been on a one-way path to widening for four weeks,” Sharon Stark, fixed-income strategist at D.A. Davidson & Co. in St. Petersburg, Florida, said in a telephone interview. “It’s getting to an adjustment point where things may settle out.”
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 cost to protect the debt of Dell Inc. (DELL) from default climbed by the most in a week as Institutional Shareholder Services Inc. said investors should accept founder Michael Dell’s $24.4 billion leveraged buyout plan.
Five-year swaps tied to the PC-maker rose 15 basis points to 392 basis points, Bloomberg prices show. The swaps rose the highest since July 1.
CEO Dell and partner Silver Lake Management LLC proposed repurchasing shares at $13.65 each. Michael Dell is contributing his 16 percent ownership in the company at $13.36 apiece and another $750 million in cash. The move would shelter shareholders from risks associated with the computer business, ISS said today.
Alcoa, the first Dow Jones Industrial Average member to report results, rose 1.41 percent to $7.92 in New York. The company, which had its credit rating cut to junk by Moody’s Investors Service in May, reported after today’s close that its earnings excluding one-time items was 7 cents a share, higher than the 6 cents a share average of 15 analysts’ estimates compiled by Bloomberg.
The default-swaps index rose 1.4 basis points on July 5 after it was reported that U.S. employers added more jobs than forecast in June, adding concern that a strengthening labor market may compel the Federal Reserve to begin curbing its $85 billion monthly bond-buying program. Payrolls grew by 195,000, according to Labor Department figures, more than the median estimate of 165,000 in a Bloomberg survey of economists.
Ten-year Treasuries rose for the first time in three days, after yields surged July 5 by the most since August 2011.
“Markets have calmed down a little bit over the weekend,” Kathy Jones, a New-York based fixed income strategist at Charles Schwab & Co., said in a telephone interview. “We’ve seen the bond market already discount in the idea the Fed is going to reduce purchases.”
The Federal Open Market Committee meeting will release minutes from its June meeting on July 10, giving investors insight into the central bank’s plans. Fed Chairman Ben S. Bernanke, who will speak that day, said last month that policy makers may “moderate” their asset purchases this year and end them in mid-2014 if economic growth meets their forecasts.
“This week will still be quite volatile because of the Fed minutes on Wednesday, which will remind the market that the Fed is set on tapering bond purchases this year,” D.A. Davidson’s Stark said.
The risk premium on the Markit CDX North American High Yield Index fell 21.3 basis points to 410.6 basis points, Bloomberg prices show.
Duke Energy Indiana sold $500 million debt in two parts to pay and refinance debt. The utility-provider sold $150 million in three-year floating rate debt 35 basis points more than the London interbank offered rate, and $350 million of 4.9 percent 30-year notes to yield 130 basis points more than similar-maturity Treasuries, according to Trace.
The average relative yield on speculative-grade, or junk-rated, debt rose 13.8 basis points to 554.6 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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