A gauge of U.S. corporate credit risk rose the most in more than a year after the Federal Reserve concluded a two-day policy meeting, spurring speculation the central bank will reduce stimulus that’s bolstered the market.
The Markit CDX North American Investment Grade Index, used to hedge against losses or to speculate on creditworthiness, increased 5.9 basis points to a mid-price of 87.7 basis points at 4:57 p.m. in New York, according to prices compiled by Bloomberg. That’s the biggest jump since the measure added 6.2 basis points on May 14, 2012, excluding rolls into new series of the benchmark.
The Federal Open Market Committee said dangers to the economy and the labor market have decreased, reiterating that future bond purchases will depend on the outlook for jobs and inflation. Fed Chairman Ben S. Bernanke said the central bank may reduce its $85 billion monthly purchases of mortgage and Treasury securities later this year and may end them in mid-2014 if the economy continues to improve as it forecasts.
“The Fed is scaring out the short-term holders but providing opportunities for the long-term holders,” Brian Reynolds, chief market strategist at Rosenblatt Securities Inc. in New York, said in a telephone interview. “It’s a short-term negative, but a long-term positive.”
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.
“If the subsequent data remain broadly aligned with our current expectations for the economy, we will continue to reduce the pace of purchases in measured steps through the first half of next year, ending purchases around mid-year,” Bernanke said today at a press conference in Washington.
U.S. stocks and Treasuries retreated and the dollar rallied on the Fed statement. Ten-year Treasury yields jumped 17 basis points to 2.35 percent, the highest in 15 months. The Dollar Index, a gauge against six major peers, rose 0.9 percent to 81.32, the highest since June 10.
Valeant Pharmaceuticals International Inc., the drug distributor acquiring Bausch & Lomb Holdings Inc., is planning to sell $3.23 billion of bonds and $4.05 billion in loans to help fund the purchase.
The Laval, Quebec-based company may sell eight- and 10-year senior bonds next week, according to a person with knowledge of the transaction who asked not to be identified because the terms weren’t set. Proceeds from the note sale will be used to fund the merger and to repay or retire Bausch’s debt, Valeant said yesterday in a statement.
The company is also seeking a $3.55 billion term loan B and a $500 million term A piece, according to a person with knowledge of that transaction, who asked not to be identified because the deal is private.
The risk premium on the Markit CDX North American High Yield Index rose 37.2 basis points to 438.7 basis points, the largest increase since March 27, Bloomberg prices show.
The average relative yield on speculative-grade, or junk-rated, debt tightened 11.1 basis points to 540.8 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.