A gauge of U.S. corporate credit risk declined for the second day amid talks about a short-term lift in the U.S. debt ceiling.
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 0.4 basis point to a mid-price of 87.2 basis points at 5:13 p.m. in New York, according to prices compiled by Bloomberg. The benchmark has increased from 84.9 basis points on Jan. 7, a 16-week low.
House Majority Leader Eric Cantor said today that the chamber plans to pass a temporary increase in the debt-limit next week. A failure to prevent a breach of the $16.4 trillion maximum might push the economy into recession, hindering companies’ ability to repay debt.
“Developments in Washington are very important in the weeks to come,” Edward Marrinan, a macro credit strategist at RBS Securities in Stamford, Connecticut, said in a telephone interview. “The announcement today provided a tailwind in the markets in the afternoon sessions.”
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 cost of protecting Morgan Stanley’s debt from losses for five years fell after the owner of the world’s biggest brokerage said earnings from that business more than doubled. Fourth-quarter net income was $507 million, or 25 cents a share, compared with a loss of $250 million, or 15 cents, a year earlier.
Default swaps on the New York-based company’s debt declined 9 basis points to 153.5 basis points as of 4:14 p.m. in New York, Bloomberg prices show. That’s the lowest since June 2011.
The risk premium on the Markit CDX North American High Yield Index dropped 2.1 basis points to 438.8 basis points, Bloomberg prices show.
The liquidity of speculative-grade borrowers remained resilient in the first few weeks of January even as corporate earnings performance has been moderate and the European sovereign-debt crises poses domestic risks, according to a report yesterday from Moody’s Investors Service.
The ratings company’s Liquidity-Stress Index, which typically falls when corporations’ ability to manage cash needs improves, dropped to 3.4 percent by mid-January, analysts led by Tom Marshella wrote in the report. That’s close to a record low of 3.1 percent in July.
The average relative yield on junk-rated debt rose 1 basis point to 4.74 percentage points, Bloomberg data show.
High-yield, high-risk debt is rated below Baa3 by Moody’s and lower than BBB- at Standard & Poor’s. A basis point is 0.01 percentage point.