U.S. Credit Swaps Rise; Goldman Sachs Sells $2.5 Billion of Debt

A benchmark of U.S. corporate credit risk rose from its lowest level in more than six weeks before Federal Reserve Chairman Ben S. Bernanke’s congressional testimony tomorrow on stimulus measures that have bolstered bond markets. Goldman Sachs (GS) Group Inc. sold $2.5 billion of debt after reporting profits that beat analysts’ estimates.

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 1 basis point to a mid-price of 78 basis points at 4:49 p.m. in New York, according to prices compiled by Bloomberg. The measure closed yesterday at 77.1 basis points, the lowest since May 30.

Investors are looking to Bernanke for indications of when the U.S. central bank may begin to reduce $85 billion in monthly asset purchases that sent borrowing costs to record lows this year. The Fed chairman’s testimony is due for release at 8:30 a.m. in Washington before he delivers his semi-annual policy report to the Senate Banking Committee.

“You won’t see much conviction going into Bernanke’s comments,” Adrian Miller, the head of fixed-income strategy at GMP Securities LLC in New York, said in a telephone interview. As credit swaps have declined since the end of June, “you’re close to reaching an equilibrium point,” he said.

The 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.

Accommodative Policy

The investment-grade swaps measure has fallen from 86.6 on July 5, when the Labor Department reported the world’s largest economy added 195,000 jobs last month.

Bernanke said July 10 that “highly accommodative monetary policy for the foreseeable future is what’s needed in the U.S. economy,” when responding to a question after a speech in Cambridge, Massachusetts. Company bond yields have risen to 4.08 percent yesterday from a record low 3.35 percent on May 2, according to the Bank of America Merrill Lynch U.S. Corporate & High Yield Index.

The risk premium on the Markit CDX North American High Yield Index rose 3 basis points to 373.7 basis points, Bloomberg prices show. The measure closed yesterday at its lowest level since May 27.

Goldman Sachs sold the 2.9 percent notes due 2018, which are expected to be rated A3 by Moody’s Investors Service, to yield 155 basis points more than similar-maturity Treasuries, according to data compiled by Bloomberg.

Earnings Double

The firm said today that earnings doubled on a surge in underwriting revenue and gains from its own investments. Second-quarter net income rose to $1.93 billion, or $3.70 a share, from $962 million, or $1.78, a year earlier. That beat the $2.89 average estimate of 27 analysts in a Bloomberg survey.

Royal Bank of Canada, the nation’s largest lender by assets, raised $1.75 billion with an issue of three-year, U.S. dollar-denominated covered bonds. The 1.125 percent notes are expected to be rated Aaa by Moody’s, Bloomberg data show.

The average relative yield on speculative-grade, or junk-rated, debt fell 4.1 basis points to 544.2 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 at sharrison52@bloomberg.net

To contact the editor responsible for this story: John Parry at jparry5@bloomberg.net

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