A benchmark gauge of U.S. corporate debt risk fell after durable goods orders and pending home sales in May increased more than forecast, building on earlier gains tied to bets that China will pursue growth-boosting measures.
The Markit CDX North America Investment Grade Index, a credit-default swaps benchmark used to hedge against losses on corporate debt or to speculate on creditworthiness, decreased 1.4 basis points to a mid-price of 117.7 basis points at 4:53 p.m. in New York, according to prices compiled by Bloomberg. Contracts tied to Lennar Corp. and Monsanto Co. declined after the companies reported quarterly profits that beat estimates.
Orders for goods meant to last at least three years rose 1.1 percent, the first increase in three months, data from the Commerce Department showed today, while the number of Americans signing contracts to buy previously owned homes surged 5.9 percent. The data signals a recovery in the U.S. manufacturing and real estate industries as the debt crisis in Europe and an economic slowdown in China raise concern about global growth.
“The pending home sales data was strong, and the recipe for that is ultra-low interest rates and some sense among homeowners that house prices have stopped falling,” Andrew Wilkinson, chief economic strategist at Miller Tabak & Co. in New York, said in a telephone interview. “There’s been more activity in that market. There’s just an increasing amount of confidence coming back. The big question of course is whether that confidence will last.”
Pending home sales surged to a two-year high, beating the 1.5 percent gain forecast by 39 economists surveyed by Bloomberg News, data from the National Association of Realtors showed today in Washington. The increase in durable goods orders also beat estimates. Economists had forecast a 0.5 percent gain according to the median of 76 estimates in a Bloomberg News survey. Excluding the volatile transportation-equipment category, bookings increased 0.4 percent.
Two separate reports in China indicated the country plans to introduce stimulus measures. The China Securities Journal said the nation may pursue “more proactive” growth policies, while the Xinhua News Agency said China plans to boost ties between Hong Kong and mainland financial markets.
“It used to be the case that investors would look forward to stimulus because they would feel a greater conviction regarding positive earnings numbers,” Wilkinson said. “We’re getting to the point where we seem to be completely dependent on stimulus to keep the economy moving, the global economy moving, which in a sense is quite worrisome.”
Contracts tied to Miami-based Lennar fell 20.3 basis points to a mid-price of 313 basis points at 4:57 p.m., Bloomberg prices show. The third-largest U.S. homebuilder by revenue said today that net income for the three months through May climbed to $452.7 million, or $2.06 a share, from $13.8 million, or 7 cents, a year earlier. Excluding a $403 million gain from a partial reversal of deferred tax assets, earnings were 21 cents a share, beating by 5 cents the average estimate of 20 analysts surveyed by Bloomberg.
The cost to guard against losses on the debt of Monsanto, the world’s largest seed company, fell 0.7 basis point to a mid-price of 65.3 basis points after the St. Louis-based firm reported a 35 percent surge in third-quarter net income to $937 million. Profit excluding a legacy tax matter was $1.63 a share, besting the $1.60 average estimate of 13 analysts surveyed by Bloomberg News.
The swaps gauge typically falls as investor confidence improves and rises as it deteriorates. 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.