A gauge of U.S. corporate credit risk rose for a third day as concern increased that the so-called fiscal cliff of automatic spending cuts and tax increases may push the U.S. economy into recession.
The Markit CDX North America Investment Grade Index, a credit-default swaps benchmark that investors use to hedge against losses or to speculate on creditworthiness, climbed 2.2 basis points to a mid-price of 106.7 basis points at 4:16 p.m. in New York, according to prices compiled by Bloomberg. That’s poised for the highest closing level since 109 basis points on Aug. 2.
A contraction of the world’s largest economy may impair corporate balance sheets and hinder companies’ ability to repay obligations. A report from the Congressional Budget Office yesterday affirmed that a failure to avoid $600 billion of tax increases and spending cuts set to take effect next year would lead to a recession in the first half of 2013.
“All week since the election people have been winding down risk” amid concerns over the so-called fiscal cliff in the U.S., Europe’s sovereign-debt crisis and the pace of economic growth in China, Noel Hebert, chief investment officer at Bethlehem, Pennsylvania-based Concannon Wealth Management LLC, said in a telephone interview. “There’s certainly been no shortage of reasons for people to get more conservative.”
The credit-risk measure rose to as high as 108.1 earlier today, paring the increase after the Thomson Reuters/University of Michigan preliminary consumer sentiment index reached a five-year high.
Credit swaps typically rise as investor confidence deteriorates and fall as it improves. 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.
FTI Consulting Inc., the business advisory firm, plans to issue $300 million of debt in its first offering this year. The company may sell 10-year notes to yield as much as 6 percent as soon as today, according to a person familiar with the offering, who asked not to be identified because terms aren’t set.
A Moody’s Investors Service gauge of the strength of speculative-grade bond covenants that protect investors held below its historical average last month. The average covenant score, in which 1 is the strongest and 5 the weakest, improved to 3.8 in October from 3.88 in September and compares with an average of 3.65 since January 2011, Moody’s analysts led by Alexander Dill wrote in a report dated yesterday.
The average relative yield on speculative-grade debt rose 2 basis points to 5.81 percentage points, led by spreads on the bonds of energy and communications companies, which widened 4 basis points, according to data compiled by Bloomberg.