U.S. Company Credit Swaps Hold; Burlington Northern Sells Bonds

A gauge of U.S. corporate credit risk held as a report showed retail sales rose for a fourth month. Burlington Northern Santa Fe LLC issued $1.5 billion in its first bond offering in five months.

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 0.2 basis point to a mid-price of 75.3 basis points as of 5:07 p.m. in New York, according to prices compiled by Bloomberg.

Investors are looking to economic data to assess when the Federal Reserve will begin tapering its $85 billion in monthly bond purchases, which have supported credit markets. Retail sales in July increased 0.2 percent after a 0.6 percent gain in June, according to Commerce Department figures issued today.

“Retail sales were more or less in line,” Michael Kraft, a senior portfolio manager at Vanderbilt Asset Management in New York, said in a telephone interview. “Right now folks are looking out for inflation figures later this week. Inflation has been relatively tame, but if there’s an indication it’s picking up, there may be pressure on the Fed to begin tapering.”

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.

Fed Steps

Fed policy makers have indicated the central bank may begin curtailing asset purchases if economic growth meets its forecasts. Atlanta Fed President Dennis Lockhart, who has backed the central bank’s bond buying, said today that policy makers may start reducing the stimulus program at any of their next few meetings amid an “uneven performance” by the economy.

“A decision to proceed -- whether it is in September, October, or December -- ought to be thought of as a cautious first step,” Lockhart, who doesn’t vote on monetary policy this year, said in a speech in Atlanta.

Payrolls have increased an average 192,000 a month this year through July compared with 182,750 in 2012, according to the Labor Department. The jobless rate in July fell to 7.4 percent, the lowest since December 2008 and down from 7.8 percent at the end of last year.

Burlington Issue

Burlington Northern, the railroad that Warren Buffett’s Berkshire Hathaway Inc. (BRK/A) bought in 2010, issued $800 million of 3.85 percent, 10-year notes that yield 117 basis points more than similar-maturity Treasuries, according to data compiled by Bloomberg. The Fort Worth, Texas-based company also sold $700 million of 5.15 percent, 30-year securities at 140 basis points more than benchmarks.

Proceeds will be used for general corporate purposes, which may include capital expenditures and debt repayment, the company said in a regulatory filing today.

The default premium on the Markit CDX North American High Yield Index, a measure of speculative-grade corporate bond risk, fell 0.6 basis point to 381.1 basis points, Bloomberg prices show.

Bond issuers in the media and entertainment, technology and health-care businesses in the U.S. accounted for 13 of this year’s 31 defaults through July, according to a report by Standard & Poor’s.

“The three sectors’ current negative biases are significantly lower than their long-term averages,” Diane Vazza, head of global fixed income research at S&P, said in the statement released today.

The average extra yield investors demand to hold investment-grade corporate debt rather than similar-maturity Treasuries held at 128.2 basis points, according to Bloomberg data. The measure for speculative-grade bonds tightened 5.4 basis points to 561.9 basis points.

High-yield, high-risk debt is rated below Baa3 by Moody’s Investors Service and less than BBB- at S&P.

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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