Moody’s Seeing Junk-Bond Protections Bolstered as Sales Decline

Financial requirements for high-yield bond issuers in North America improved for a third month, according to Moody’s Investors Service. A measure of U.S. corporate credit risk held at about a three-week low.

High-yield, high-risk covenant quality improved to 3.84 in January from 4 in December, according to a Moody’s report dated yesterday. A lower score denotes stronger covenant quality on a scale from 1 to 5.

Speculative-grade bond sales in the U.S. rose to a record $380 billion last year, according to data compiled by Bloomberg, as covenant quality reached its weakest level ever in October. Offerings of $33.8 billion this year are off to their slowest start since 2010 as investors pulled $913 million from U.S. high-yield funds last week, according to a Feb. 10 report from Bank of America Merrill Lynch.

The strengthening covenants are a move “in the right direction, but it’s still not gotten its head above water,” Alexander Dill, the head of covenant research at Moody’s, said today in a telephone interview. The improvement was linked to a smaller percentage of bonds lacking covenants restricting a company’s ability to distribute cash to shareholders or to incur more debt, he said.

The Markit CDX North American Investment Grade Index, a credit-default swaps benchmark used to hedge against losses or to speculate on creditworthiness, decreased 0.2 basis point to 65.4 basis points at 4:12 p.m. in New York, according to prices compiled by Bloomberg. The measure is poised to reach the lowest closing level since Jan. 21.

‘Measured Steps’

The swaps measure 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.

Federal Reserve Chairman Janet Yellen, in her first report to Congress yesterday since being sworn in as Fed chairman last week, pledged to maintain the policies of her predecessor, Ben S. Bernanke, by scaling back stimulus in “measured steps.”

“If there were any fears out there that you might see some hesitation from Yellen, those fears were dispelled,” Michael Kraft, a senior money manager at Vanderbilt Avenue Asset Management in New York, said in a telephone interview. The public remarks “reinforced people’s view that Yellen is going to be very dovish and also very supportive of the environment that was created under Bernanke.”

JPMorgan Bonds

JPMorgan Chase & Co. (JPM), the biggest U.S. bank, sold $2.5 billion of 1.35 percent, three-year notes to yield 65 basis points more than similar-maturity Treasuries and $1.75 billion of three-year floating-rate securities at 52 basis points more than the three-month London interbank offered rate, according to data compiled by Bloomberg. The fixed notes may be graded A3 by Moody’s, the data show.

Bonds of JPMorgan were the most actively traded dollar-denominated corporate securities by dealers today, accounting for 4.5 percent of the volume of dealer trades of $1 million or more, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.

The risk premium on the Markit CDX North American High Yield Index, tied to the debt of 100 speculative-grade companies, narrowed 0.3 basis point to 324.1, Bloomberg prices show. High-yield, high-risk bonds are rated below Baa3 by Moody’s and less than BBB- at Standard & Poor’s. A basis point is 0.01 percentage point.

The extra yield investors demand to hold investment-grade corporate bonds rather than government debt was little changed at 111.2, Bloomberg data show.

To contact the reporter on this story: Jessica Summers in New York at jsummers20@bloomberg.net

To contact the editor responsible for this story: Shannon D. Harrington at sharrington6@bloomberg.net

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