A gauge of U.S. corporate credit risk declined as U.S. gross domestic product grew and home sales reached a three-year high, offsetting faltering budget talks and a rise in jobless claims.
The Markit CDX North American Investment Grade Index, a credit-default swaps benchmark that investors use to hedge against losses or to speculate on creditworthiness, fell 1.1 basis points to a mid-price of 88.8 basis points at 4:30 p.m. in New York, according to prices compiled by Bloomberg.
The U.S. economy grew at a 3.1 percent annual rate in the third quarter, figures from the Commerce Department showed today in Washington, while sales of previously owned homes rose in November. Improving economic data may ease investor concern that the global economy will deteriorate, hindering companies’ ability to repay debt.
“We were a little surprised by the upward revision to GDP, but the best news was reinforcement that housing is continuing to show signs of improvement,” Zane Brown, a fixed-income strategist at Lord Abbett & Co. in Jersey City, New Jersey, said in a telephone interview. “All eyes continue to be less on historic economics and more on likely resolutions to the fiscal cliff and eventual discussions on the budget.”
The White House warned business leaders yesterday that talks between President Barack Obama and House Speaker John Boehner to avert more than $600 billion in tax increases and spending cuts set to start in January are regressing. Boehner said today he expects to keep working on a budget plan with President Obama.
Growth in the world’s largest economy exceeded the highest projection in a Bloomberg survey and a previously estimated 2.7 percent gain. Purchases of existing houses increased 5.9 percent to a 5.04 million annual rate, the most since November 2009, the National Association of Realtors reported today. First-time claims for unemployment insurance payments rose 17,000 to 361,000 in the week ended Dec. 15, according to the Labor Department.
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 on junk-rated debt dropped 1 basis point to 5.09 percentage points today, Bloomberg data show. The bonds of utility companies tightened 4 basis points to 10.3 percentage points. High-yield, high-risk debt is rated below Baa3 by Moody’s Investors Service and lower than BBB- at Standard & Poor’s. A basis point is 0.01 percentage point.
The U.S. high-yield default rate should remain below average next year, Fitch Ratings said in a report today. The ratings firm expects a rate of 2 percent in 2013, in line with 2012.
“The leading support for another below-average default year is Fitch’s expectation of modestly higher U.S. GDP growth of 2.3 percent in 2013 combined with relatively good corporate fundamentals and the Federal Reserve’s commitment to loose monetary policy,” Fitch analysts including Mariarosa Verde wrote. According to Fitch, the low default rate should be viewed with caution, “as more of a lagging rather than leading indicator of credit conditions.”
The risk premium on the Markit CDX North American High Yield Index declined 3 basis points to 454.5 basis points, Bloomberg prices show.
Credit swaps protecting against losses on the debt of Darden Restaurants Inc. rose 24.5 basis points to 211.4 basis points 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.
The owner of the Red Lobster and Olive Garden chains reported earnings per share of 31 cents in its second fiscal quarter excluding 5 cents related to Yard House costs, above estimates of 30 cents. The Orlando, Florida-based company reaffirmed its earnings per share forecast for 2013 of between $3.29 and $3.49.