Corporate Credit Swaps in U.S. Pare Increase After Fed Minutes

A gauge of corporate credit risk in the U.S. pared the biggest increase in almost three weeks after minutes of Federal Reserve policy makers’ most recent meeting showed many members support additional stimulus.

The Markit CDX North America Investment Grade Index, a credit-default swaps benchmark that investors use to hedge against losses on corporate debt or to speculate on creditworthiness, added 0.8 basis point to a mid-price of 99.4 basis points at 5:50 p.m. in New York, according to prices compiled by Bloomberg. The index rose to as high as 100.4 before today’s release of minutes of the Federal Open Market Committee’s July 31 to Aug. 1 policy meeting.

The swaps index climbed from the lowest in more than 15 weeks as investor concern increases that an economic slowdown will taint corporate balance sheets and undermine companies’ ability to repay debt. FOMC members “judged that additional monetary accommodation would likely be warranted fairly soon unless incoming information pointed to a substantial and sustainable strengthening in the pace of the economic recovery,” the minutes said.

“We’ve had a nice sort of zero-resistance run for the last few weeks,” Noel Hebert, chief investment officer at Bethlehem, Pennsylvania-based Concannon Wealth Management LLC, which oversees about $250 million, said in a telephone interview. Investors are saying, “We’re getting back into that zone where people start coming back in from vacation and reinserting uncertainty into the landscape so why not just take a little bit off the table?” he said.

Swap Spread

The index, which tends to rise as investor confidence deteriorates and fall as it improves, declined to as low as 96.9 on Aug. 21, the lowest intraday level since May 4. It’s fallen from 117.3 basis points on July 25. Today’s increase was the biggest since Aug. 2.

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.

The U.S. two-year interest-rate swap spread, a measure of stress in credit markets, narrowed 1.53 basis points to 19.22 basis points. The measure, which falls when investors favor assets such as corporate bonds and rises when they seek the perceived safety of government securities, has declined from 54.7 in November.

The Markit iTraxx Europe Index of 125 companies with investment-grade ratings increased 4.5 basis points to 141.7 and the Markit iTraxx Crossover Index of credit-default swaps on 50 companies with mostly high-yield credit ratings added 13.6 basis points to 575.1, Bloomberg prices show.

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