A benchmark gauge of U.S. credit risk dropped for a sixth straight day in the longest stretch of declines since December after the Federal Reserve raised its assessment of the world’s largest economy.
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, fell 1.1 basis points to a mid-price of 90.9 basis points at 4:44 p.m. in New York, according to Markit Group Ltd. Credit-default swaps on Citigroup Inc.’s subordinated debt fell to the lowest level since August.
The swaps gauge slid to an eight-month low a day after the Fed said yesterday that the U.S. labor market is gathering strength and refrained from new actions to lower borrowing costs. The central bank also said that 15 of the 19 largest U.S. banks could maintain adequate capital levels even in a severe recession.
The index, which typically falls as investor confidence improves and rises as it deteriorates, touched 90.8 basis points, the lowest level since July 8.
Credit-default swaps tied to Citigroup’s subordinated debt declined, easing 15.1 basis points to 260 basis points, according to data provider CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market. Subordinated debt falls lower in a company’s capital structure and is paid after senior debt in a bankruptcy. A basis point equals $1,000 annually on a contract protecting $10 million of debt.
The Fed objected yesterday to New York-based Citigroup’s capital plan, which may have included a request for a higher dividend, in a test of how 19 of the nation’s biggest lenders would fare in a severe economic slump.
“The company can weather a pretty drastic stress test and still come out relatively unscathed,” said Adam Steer, an analyst at Brookfield Investment Management Inc., whose parent, Brookfield Asset Management Inc., oversees about $150 billion in assets. “They’re not going to be allowed to return as much wealth to shareholders that could otherwise be used to benefit bondholders.”
Contracts on Goldman Sachs Group Inc. senior debt declined 8.8 basis points to 221.3, and those on Wells Fargo & Co. decreased 4.5 basis points to 80.5, CMA data show. Credit-default swaps on Morgan Stanley fell 13.4 basis points to 297.6. Credit swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt.
“If regulatory handcuffs prevent Citi from paying dividends to stockholders, bondholders should rejoice,” said Bonnie Baha, head of the global developed credit group at DoubleLine Capital LP in Los Angeles.