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U.S. Corporate Credit Swaps Drop Most in Year on Budget Optimism

Updated on

A gauge of U.S. corporate credit risk fell the most in a year as President Barack Obama expressed confidence he will reach a budget agreement with Congress.

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, declined 6.2 basis points to a mid-price of 103 basis points at 4:43 p.m. in New York, according to prices compiled by Bloomberg. The measure is poised for the largest drop since Nov. 30, 2011.

A compromise by lawmakers on a deal to avert the so-called fiscal cliff may lessen investor concern that an economic slowdown will hinder companies’ ability to repay debt. The president met with senior Democrats and Republicans on Nov. 16 for talks to avoid $607 billion in spending cuts and tax increases set to take effect next year. Obama said yesterday at a news conference in Bangkok that he was confident the fiscal situation could be resolved.

“At the end of the day the market truly does not care or differentiate between a mini-bargain and a grand bargain,” Adrian Miller, a fixed-income strategist at GMP Securities LLC in New York, said in a telephone interview. Lawmakers are indicating that “we’ll give you a small deal by the end of the year,” he said. “Just enough to sidestep the cliff.”

Home Sales

Sales of previously owned U.S. homes climbed in October, indicating gains in the real estate market are being sustained by cheap borrowing costs. Purchases of existing houses, tabulated when a contract closes, increased 2.1 percent to a 4.79 million annual rate, exceeding the 4.74 percent median estimate in a Bloomberg survey, figures from the National Association of Realtors showed today in Washington.

The credit-swaps index typically falls as investor confidence improves and rises 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.

The average relative yield for investment-grade bonds is trading 4 basis points wider than the average cost to protect the debt with credit-default swaps, JPMorgan Chase & Co. strategists led by Peter Acciavatti wrote in a Nov. 16 note to clients. Average bond spreads had fallen below protection costs for the first time in 14 months according to a Nov. 2 note from JPMorgan analysts.

BSkyB Offering

British Sky Broadcasting Group Plc, the U.K.’s biggest pay-TV provider, sold $800 million of 10-year bonds in its first debt sale in four years. The company, in which Rupert Murdoch’s News Corp. owns about 39 percent, issued the 3.125 percent debentures to yield 157 basis points more than similar-maturity Treasuries, according to data compiled by Bloomberg. The coupon is the company’s lowest on record, the data show.

The average spread on speculative-grade debt narrowed 6 basis points to 6.02 percentage points, led by an 11 basis-point drop in the average relative yield of consumer discretionary companies’ bonds to 6.04 percentage points, according to prices compiled by Bloomberg.

The number of junk-rated companies that are under liquidity stress rose to the highest level since March as the European debt crisis and U.S. tax increases and spending cuts that might begin in January would reduce access to credit, Moody’s Investors Service analysts led by John Puchalla wrote in a Nov. 16 report. The company’s Liquidity-Stress Index rose to 4 percent by mid-November from 3.6 percent in October, and below the 7.5 percent long-term average for the measure.

High Yield

The risk premium on the Markit CDX North America High Yield Index, a measure of U.S. speculative-grade corporate debt risk, dropped 30.5 basis points to 533.9 basis points, poised for the largest decline since June 29, Bloomberg data show.

Credit swaps tied to Clear Channel Communications Inc. dropped 1.9 percentage points to 46.9 percent upfront, as of 3:30 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. That’s in addition to 5 percent a year, meaning it would cost $4.69 million initially and $500,000 annually to protect $10 million of the company’s debt.

The company’s Clear Channel Outdoor Holdings Inc. unit today announced the early settlement of a tender offer for Clear Channel Worldwide Holdings Inc.’s notes due in 2017 and called for the redemption of the remaining debt by Dec. 19.

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