A benchmark gauge of U.S. credit risk climbed to the highest in almost two weeks as Europe’s economy contracted in the fourth quarter, stoking investor concern that the pace of global economic growth may falter.
The Markit CDX North America Investment Grade Index of credit-default swaps, which investors use to hedge against losses on corporate debt or to speculate on creditworthiness, increased 2.6 basis points to a mid-price of 97.9 basis points at 5:15 p.m. in New York, according to Markit Group Ltd. The measure rose as high as 98.3, the most since Feb. 22 on an intraday basis.
The gauge, which typically increases as investor confidence deteriorates, climbed for a third straight day as the European Union’s statistics office said gross domestic product shrank 0.3 percent from the third quarter, confirming an estimate published Feb. 15. Investors weighed Greece’s chances of persuading creditors to agree to a bond swap under its private-sector involvement plan.
“There are still multiple hurdles and milestones we need to get through, which will happen over months and quarters if not well over a year before Europe is completely settled,” David Brown, a money manager who helps oversee $88 billion of fixed-income assets at Neuberger Berman in Chicago, said in a telephone interview.
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.
Radian Swaps Jump
The cost to protect debt issued by insurers from Radian Group Inc. to Prudential Financial Inc. rose after a report that the Federal Housing Administration will lower mortgage insurance premiums for borrowers who refinance their loans.
Credit-default swaps on Philadelphia-based Radian jumped 3.8 percentage points to 36.6 percent upfront, and contracts on Red Bank, New Jersey-based Hovnanian Enterprises Inc. surged 2.2 to 48.4 percent as of 5 p.m. in New York, according to data provider CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market.
President Barack Obama said he would reduce refinancing fees at a White House news conference today. The FHA will decrease up-front premiums to 0.01 percent from 1 percent under the plan. Annual fees will decline to 0.55 percent from 1.15 percent for borrowers with FHA loans made before June 1, 2009, according to a fact sheet distributed by the Obama administration.
Private mortgage insurers such as Radian compete against the FHA, providing coverage on loans when borrowers make down payments of less than 20 percent. Credit-default swaps tied to Prudential, the second-largest U.S. life insurer, jumped 16.3 basis points to 185 basis points, and those on MetLife Inc. added 18.5 to 235, the data show.
The streamlined refinance program is available to borrowers with FHA-insured loans who are current on their payments even if they owe more than their homes are worth. The program doesn’t require verification of income and employment, and it doesn’t mandate a new appraisal of the property.
Contracts tied to Lincoln National Corp. added 21.2 basis points to 247.8, and those on Hartford Financial Services Group Inc. increased 22.1 basis points to 251.4, the data show.
Companies sold at least $24.8 billion of bonds in the U.S. yesterday, the busiest day in almost a year, with investment-grade yields at about record lows. The supply and a lack of support from dealers are weakening the secondary market, according to Adrian Miller, a fixed-income strategist at GMP Securities LLC in New York.
“Stress is beginning to show,” he said. “Even though there’s demand for it, there’s always a balance between demand and price valuations.”
The U.S. two-year interest-rate swap spread, a measure of stress in credit markets, widened 1.65 basis points to 27.40 basis points. The measure rises when investors seek the perceived safety of government securities and narrows when they favor assets such as corporate bonds.