U.S. Corporate Credit Swaps Rise as Consumer Confidence Mounts

May 31 (Bloomberg) -- A gauge of U.S. corporate credit risk rose to the highest level in five weeks as debate deepened on the future pace of central bank stimulus measures amid stronger consumer sentiment.

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, increased 2.9 basis points to a mid-price of 79.2 basis points at 4:09 p.m. in New York, according to prices compiled by Bloomberg. That’s the biggest increase since May 1 for the index, which ended the week at the highest level since April 24.

Investors are considering how long the Federal Reserve will keep buying $85 billion of Treasury and mortgage debt a month to support the economy. Evidence of a sustained recovery could prompt the central bank to “take a step down in our pace of purchases” in the “next few meetings,” Fed Chairman Ben S. Bernanke said in testimony to lawmakers last week.

“The market freaks out about tapering, and everybody is very sensitive as to when the Fed is going to remove quantitative easing,” Scott Colyer, who manages $11 billion as chief investment officer at Advisors Asset Management in Monument, Colorado, said in a telephone interview. “The truth is, the sooner it’s removed, the sooner the patient is off life support.”

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

Consumer Sentiment

The Thomson Reuters/University of Michigan final index of U.S. consumer sentiment climbed in May to 84.5, the highest level since July 2007, from 76.4 a month earlier. The MNI Chicago Report’s business barometer rose to 58.7 this month, with a reading greater than 50 signaling expansion.

The risk premium on the Markit CDX North American High Yield Index climbed 18.5 basis points to 390.8 basis points, Bloomberg prices show. That’s the biggest jump since traders started moving into a new version of the measure on March 27.

“With the market now considering what life might look like without quantitative easing, let alone the eventual end to a zero interest rate policy, we have seen rising concerns about credit investors’ exposure,” RBS Securities Inc. analysts led by Edward Marrinan wrote in a note today. “Although our economists believe it is not until September when the first real opportunity to taper is presented, many market participants have already begun to price in potential tapering in various asset classes.”

Overdue Deposit

The cost to protect against a default on bonds issued by American International Group Inc.’s plane-leasing arm rose the most in more than five months after the insurer said it hasn’t received a deposit needed in a deal to sell the unit to a group of Chinese investors.

Five-year credit swaps tied to International Lease Finance Corp. rose by as much as 21.9 basis points to a mid-price of 284.8 basis points, the biggest jump since Dec. 17, according to prices compiled by Bloomberg. The contracts traded at 281.8 basis points at 4:02 p.m. in New York, which means it would cost the equivalent of $281,800 annually to protect $10 million of obligations for five years.

The deposit for a deal with a group led by New China Trust Co. Chairman Weng Xianding, which agreed in December to buy 80 percent of Los Angeles-based ILFC for $4.23 billion, was not received by the escrow agent when due, AIG said in a regulatory filing. New York-based AIG has the right to cancel the accord if the payment is not made.

The average relative yield on speculative-grade, or junk-rated, debt widened 4.7 basis points to 506.6 basis points, Bloomberg data show. High-yield, high-risk debt is rated below Baa3 by Moody’s Investors Service and less than BBB- at Standard & Poor’s.

To contact the reporter on this story: Victoria Stilwell in New York at vstilwell1@bloomberg.net

To contact the editor responsible for this story: Alan Goldstein at agoldstein5@bloomberg.net