Corporate Credit Swaps in U.S. Pare Declines After Fed Release

A gauge of U.S. corporate credit risk pared declines after minutes from the Federal Reserve policy meeting last month showed that officials want to see more progress in employment before reducing asset purchases.

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 0.2 basis point for the day to 81.6 basis points, according to prices compiled by Bloomberg. The measure had earlier climbed as high as 82.8 before the release and as low as 79.8 immediately afterward.

The moves in the index show minutes from the Fed meeting failed to diminish speculation that the central bank will reduce the pace of its $85 billion in monthly bond purchases, known as quantitative easing, which has boosted the credit markets.

“Many members indicated that further improvement in the outlook for the labor market would be required before it would be appropriate to slow the pace of asset purchases,” according to the record of the Federal Open Market Committee’s June 18-19 gathering released today in Washington.

The minutes also said that cumulative decline in unemployment since September and gains in private payrolls “had increased their confidence in the outlook for sustained improvement in labor market conditions.”

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.

‘Mildly Reassuring’

“The minutes were mildly reassuring that the Fed will be less aggressive in reducing purchases,” Anthony Valeri, a market strategist in San Diego with LPL Financial Corp., said in a telephone interview. “There’s nothing to suggest with certainty they would start tapering in July, and it looks like this September to December window has calmed the nerves.”

Southern Power Co. (SO) issued $300 million of 5.25 percent, 30-year notes at 160 basis points more than similar-maturity Treasuries, according to data compiled by Bloomberg. Proceeds from the sale will be used to refinance debt and for general corporate purposes.

The risk premium on the Markit CDX North American High Yield Index fell 1.1 basis points to 401.1 basis points, Bloomberg prices show.

Covenant Quality

The average for Moody’s Investors Service’s covenant quality index for U.S. high-yield bond issuance fell to 3.72 in June from 3.99 in May, according to a report from analysts led by Alexander Dill yesterday. The reading, which measures covenant quality on a five-point scale with 5 signifying the weakest bondholder protection and 1 the strongest, is the lowest since 3.63 in December.

“With issuance down sharply in June and many companies postponing deals, those that went to market may have had to offer somewhat better covenant terms to a suddenly more discriminating market,” the analysts wrote.

The average relative yield on speculative-grade, or junk-rated, debt fell 1.9 basis points to 553.4 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.

To contact the reporter on this story: Scott Harrison in New York at sharrison52@bloomberg.net

To contact the editor responsible for this story: Alan Goldstein at agoldstein5@bloomberg.net

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