Corporate Credit Swaps in U.S. Fall After August Payrolls Report

A gauge of U.S. company credit risk fell the most in two weeks after a slower-than-forecast gain in employment last month.

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, declined 1.8 basis points to a mid-price of 81.8 basis points as of 4:23 p.m. in New York, according to prices compiled by Bloomberg. Earlier the measure decreased as much as 2.4 basis points, the biggest intraday fall since Aug. 22.

Investors are looking at the strength of the economic recovery to ascertain when the Federal Reserve will begin to reduce its $85 billion in monthly bond purchases that have bolstered credit markets. Employers added 169,000 workers in August, Labor Department figures showed today in Washington, lower than the 180,000 median forecast of 96 economists surveyed by Bloomberg.

“People are starting to think the economy is not recovering as fast and there’s a little weakness,” Andrew Brenner, head of international fixed income for National Alliance Securities, said in a telephone interview. “With these kinds of numbers out there, it doesn’t necessarily mean that September is a no-go for tapering, but the odds are less.”

Credit swaps, which typically decline when investor confidence increases and rise when it wanes, 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.

September Tapering

The Federal Open Market Committee will probably vote to taper its unprecedented stimulus program when it meets Sept. 17-18, according to 65 percent of economists surveyed by Bloomberg Aug. 9-13.

Fed Bank of Chicago President Charles Evans said today that the central bank shouldn’t pare its monthly bond buying until inflation and economic growth pick up. He is a voter on policy this year.

“To start the wind-down, it will be best to have confidence that the incoming data show that economic growth gained traction during the third quarter of this year and that the transitory factors that we think have held down inflation really do turn out to be transitory,” Evans said in a speech today in Greenville, South Carolina.

The risk premium on the Markit CDX North American High Yield Index, a credit-swaps benchmark tied to speculative-grade bonds, fell 5.9 basis points to 398.6, Bloomberg prices show.

The average extra yield investors demand to hold dollar-denominated, investment-grade corporate bonds rather than similar-maturity Treasuries widened 2 basis points to 131.4 basis points, Bloomberg data show. The measure for speculative-grade, or junk-rated, debt increased 4.3 basis points to 582.6.

Investment-grade debt is rated Baa3 or higher at Moody’s Investors Service and at least BBB- by Standard & Poor’s.

To contact the reporter on this story: Callie Bost in New York at cbost2@bloomberg.net

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

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