Credit Swaps in U.S. Reach 2-Week High as Fed Maintains Stimulus

A measure of U.S. company credit risk rose to the highest level in two weeks as the Federal Reserve said it needs to see more evidence that the economy will continue to improve before reducing monetary stimulus.

The Markit CDX North American Investment Grade Index, a credit-default swaps gauge that investors use to hedge against losses or to speculate on creditworthiness, increased 1.9 basis points to 73 basis points at 5:26 p.m. in New York, according to prices compiled by Bloomberg. That’s the highest level for the index since it closed at 73.6 basis points on Oct. 16.

Investors are interpreting the Federal Open Market Committee’s mention of economic growth since the Fed’s bond-buying program began as a signal that the central bank may cut back stimulus sooner than anticipated, according to Scott MacDonald, head of research at Stamford, Connecticut-based MC Asset Management Holdings LLC. The FOMC won’t reduce the pace of purchases until its March 18-19 meeting, according to the median estimate of an Oct. 17-18 Bloomberg News survey of economists.

“Maybe people are reading that this might indicate the FOMC might move sooner than March, but we have a ways to go here,” MacDonald said in a telephone interview. The statement was “slightly more hawkish than people anticipated, especially considering the downtick in economic data lately.”

‘Evidence’ Awaited

The swaps gauge typically rises as investor confidence deteriorates and falls as it improves. Credit swaps 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.

“Taking into account the extent of federal fiscal retrenchment over the past year, the committee sees the improvement in economic activity and labor market conditions since it began its asset purchase program as consistent with growing underlying strength in the broader economy,” the FOMC said in a statement released at 2 p.m. New York time.

The Fed repeated that it will “await more evidence that progress will be sustained before adjusting the pace” of its purchases, which will remain divided between $40 billion a month of mortgage bonds and $45 billion in Treasury securities.

The central bank left unchanged its statement that it will probably hold its target interest rate near zero “at least as long as” unemployment exceeds 6.5 percent, so long as the outlook for inflation is no higher than 2.5 percent.

Procter & Gamble

Procter & Gamble Co. (PG), the world’s largest consumer-products maker, sold $2 billion of bonds in three parts.

The maker of Crest toothpaste and Tide detergent issued $1 billion of three-year notes, split evenly between 0.75 percent, fixed-rate debentures to yield 20 basis points more than similar-maturity Treasuries and floating-rate debt to yield 8 basis points more than the three-month London interbank offered rate, according to data compiled by Bloomberg. It also sold $1 billion of 1.6 percent, five-year debt at a relative yield of 40 basis points.

The bonds are expected to be rated Aa3 by Moody’s Investors Service, Bloomberg data show.

The next wave of company defaults isn’t likely to reach the rate triggered by the financial crisis five years ago, according to a report from Moody’s.

“We’ll get a longer default cycle, but not as sharp,” David Keisman, lead author of the report, said in a telephone interview yesterday.

The speculative-grade default rate in the U.S. will be “relatively stable” over the next year after ending the third quarter at 2.6 percent, according to a Moody’s report dated Oct. 16.

Default Rate

The credit rater forecast a high-yield default rate at year-end of 2.7 percent, declining to 2.6 percent by September 2014, according to the Oct. 16 report. The rates compare with a cyclical peak of more than 14 percent in late 2009 and a 20-year average of 4.5 percent.

The risk premium on the Markit CDX North American High Yield Index, a credit-swaps benchmark tied to speculative-grade bonds, increased 8.6 basis points to 354 basis points, Bloomberg prices show.

The average extra yield investors demand to hold dollar-denominated, investment-grade corporate bonds rather than similar-maturity Treasuries fell 0.7 basis point to 124.7 basis points, Bloomberg data show.

Investment-grade debt is rated Baa3 or higher at Moody’s 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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