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Company Credit Swaps in U.S. Decline as Pending Home Sales Rise

A gauge of U.S. corporate credit risk fell for the second day as pending home sales increased in January, reaching the highest level since April 2010.

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, decreased 2.3 basis points to a mid-price of 87.2 basis points at 4:23 p.m. in New York, according to prices compiled by Bloomberg. The index has dropped 1.6 basis points in February and is down 7.2 basis points this year.

Signs that the housing market is strengthening may ease investor concern that an economic slowdown will constrain companies’ ability to repay debt. The index of pending sales of existing homes increased 4.5 percent to 105.9 in January, a report from the National Association of Realtors showed today in Washington. A report yesterday showed new-home sales in January reached the highest mark since July 2008.

“Investors look at housing data like a dashboard which would drive recovery as it is a trickle-down effect,” William Larkin, a fixed-income money manager who helps oversee $500 million at Cabot Money Management Inc., said in a telephone interview from Salem, Massachusetts.

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.

Weakest Links

So called “weakest links” accounted for 45 of the 63 corporate issuers that defaulted in 2012, Diane Vazza, managing director of Standard & Poor’s global fixed-income research, said in a report by the ratings company today. Weakest links are issuers rated B- or lower with either negative outlooks or are on CreditWatch with negative implications, according to S&P.

“Historically, once a company becomes a weakest link, it is much more likely to default than the rest of the speculative-grade segment,” Vazza said.

The average relative yield on speculative-grade, or junk-rated, debt rose 0.2 basis point to 505.2 basis points, data compiled by Bloomberg show.

High-yield, high-risk debt is rated below Baa3 by Moody’s Investors Service and less than BBB- at Standard & Poor’s.

Bernanke Testimony

Federal Reserve Chairman Ben S. Bernanke said the central bank’s easing policies are helping to improve demand for homes and cars.

“The fact that interest rates have gone up a bit is actually indicative of a stronger economy,” Bernanke said in Washington today in response to questions from members of the House Financial Services Committee. That indicates the Fed’s stimulus is working, he said.

“As an investor you shouldn’t bet against the Fed. You want the Fed to be on the sidelines, not interfering in the recovery by removing liquidity and changing policies,” Larkin said. Remarks from the Fed chief are adding to the positive sentiment driven by economic data, he said. The risk premium on the Markit CDX North American High Yield Index dropped 10.6 basis points to 436 basis points, Bloomberg prices show.

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