Credit Swaps in U.S. Rise as Fed Outlines Stimulus Exit

A measure of U.S. corporate credit risk climbed after the Federal Reserve predicted its target interest rate would rise by the end of next year and reduced its monthly bond buying to $55 billion.

The Markit CDX North American Investment Grade Index, a credit-default swaps benchmark used to hedge against losses or to speculate on creditworthiness, rose 1.3 basis points to 64.5 basis points at 4:20 p.m. in New York, according to prices compiled by Bloomberg. The measure increased from an intraday low of 62.4 basis points.

Fed policy makers estimated the central bank’s benchmark interest rate will be 1 percent at the end of 2015 and 2.25 percent a year later, higher than previously forecast, as they upgraded projections for gains in the labor market. The Federal Open Market Committee said today in a statement it will look at a wide range of data in determining when to raise the rate from zero, dropping a pledge tying borrowing costs to a 6.5 percent unemployment threshold.

“What the market is pricing in now, is that the Fed may actually move a little bit sooner than what they thought coming into this news,” Scott Carmack, a money manager at Portland, Oregon-based Leader Capital Corp., which oversees $1.1 billion in fixed income, said in a telephone interview. “The market is going to start shifting focus to when they actually raise the short-term rate.”

The swaps gauge 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.

Rate Forecast

Most FOMC participants reiterated their view that the Fed will refrain from raising the benchmark interest rate until 2015. The median rate among 16 Fed officials rose from December, when they estimated the rate at the end of next year at 0.75 percent, and 1.75 percent for the end of 2016.

The Fed, which announced another reduction of $10 billion to its monthly bond purchases, has undertaken three rounds of bond-buying since 2008 under the quantitative-easing stimulus strategy, swelling its balance sheet to a record $4.2 trillion.

Series 22 of the Markit CDX North American Investment Grade Index will begin trading tomorrow, according to a Markit Group Ltd. statement dated March 13. 21st Century Fox America Inc., Weyerhaeuser Co., Newmont Mining Corp. and Procter & Gamble Co. will be added to the index. News America Inc., Cisco Systems Inc., Goodrich Corp., and Cigna Corp. will be removed.

Index Rolls

New versions of Markit’s indexes are created every six months. Companies in the index are replaced if they no longer hold appropriate grades, aren’t among the most actively traded borrowers or fail to meet other criteria.

Walter Energy Inc. (WLT), a coal producer with mines from West Virginia to Wales, is planning to sell $350 million of six-year, payment-in-kind notes and to add $100 million to its $450 million of 9.5 percent, first-lien notes due 2019, according to a statement from the company today.

The risk premium on the Markit CDX North American High Yield Index, tied to the debt of 100 speculative-grade companies, widened 5.4 basis points to 322.2 basis points, Bloomberg prices show. Speculative-grade bonds are rated below Baa3 by Moody’s Investors Service and lower 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 fell 2.5 basis points to 98.3, Bloomberg data show.

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

To contact the editors responsible for this story: Shannon D. Harrington at sharrington6@bloomberg.net John Parry, Richard Bravo

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