Credit Swaps in U.S. Hold Unchanged as Housing Starts Increase

A gauge of corporate credit risk was little changed amid reports that new housing construction and sales of existing homes in the U.S. both rose in August.

The Markit CDX North America Investment Grade Index, a credit-default swaps benchmark that investors use to hedge against losses on company debt or to speculate on creditworthiness, increased 0.1 basis point to a mid-price of 85.5 basis points at 5:06 p.m. in New York, according to prices compiled by Bloomberg. Credit swaps tied to Dole Food Co. fell to the lowest level in more than seven years.

The index reached an 18-month low of 83 basis points last week after the Federal Reserve announced a third round of bond buying to stimulate the economy and said it expects to hold its interest-rate target near zero through at least mid-2015. With investor demand for higher-yielding assets pushing corporate borrowing costs to the lowest ever, company bond sales are on pace for a record September, data compiled by Bloomberg show.

“We’re hearing that this could be a $100 billion-plus month and the deals are being absorbed pretty readily, which is going to see the index tighten further,” said Marc Pinto, head of corporate bond strategy at Susquehanna International Group LLP.

The index declined as the Commerce Department reported that builders began construction on new homes at a 750,000 annual rate, up from a revised 733,000 rate in July. Existing homes were sold at a 4.82 million annual rate in August, up from 4.47 million in July, figures from the National Association of Realtors showed today in Washington. An improving housing market might allay investor concerns that a slowing economy will impair corporate balance sheets.

Dole Swaps

Credit swaps typically fall as investor confidence improves and rise as it deteriorates. 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.

Swaps tied to Dole dropped to the lowest since May 2005 after the fruit and vegetable producer announced this week that it will sell two of its units to Itochu Corp. for $1.69 billion in cash.

The contracts declined 75.6 basis points to 194.4 basis points as of 4:30 p.m. in New York, according to data provider CMA, which is owned by McGraw-Hill Cos. and compiles prices quoted by dealers in the privately negotiated market. The cash infusion may ease investor concern that the Westlake Village, California-based company will not be able to repay its debt.

J.C. Penney

Contracts on J.C. Penney Co. rose to 7 percent upfront at 4:35 p.m. in New York, according to CMA. That’s up from 6.55 percent upfront yesterday, and means investors now pay $700,000 initially and $500,000 annually to protect $10 million of J.C. Penney’s debt. Chief Executive Officer Ron Johnson said that the company’s new shops are doing better than the rest of the store.

The cost to protect against losses on U.S. speculative-grade bonds fell. The risk premium on the Markit CDX North America High Yield Index declined 2 basis points to 448.3 basis points, Bloomberg prices show.

A measure of liquidity stress for U.S. speculative-grade companies rose, according to a report today from Moody’s Investors Service. The ratings company’s Liquidity-Stress Index, which typically rises when corporations’ ability to manage cash needs deteriorates, increased to 3.5 percent in August, up from a record low of 3.1 percent in July.

“Liquidity remains healthy despite a number of potential risks, including a sluggish global economy and overhang from the European sovereign debt crisis,” wrote John Puchalla, vice president and senior credit officer at Moody’s. “The low LSI suggests that the US speculative-grade default rate likewise will remain low over the coming year.”

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