A gauge of corporate credit risk in the U.S. fell for a second day after the Federal Reserve maintained the pace of its bond purchases. BMC Software Inc. is planing to sell $1.38 billion of bonds.
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, declined 0.8 basis point to a mid-price of 74.8 basis points at 4:19 p.m. in New York, according to prices compiled by Bloomberg. It fell as low as 73.3 after the Fed announcement.
The central bank pledged at the end of its two-day meeting to continue buying $85 billion of bonds in a program that’s bolstered credit market. The Federal Open Market Committee reaffirmed that a “highly accomodative” stance will remain in effect for a “considerable time,” according to a statement today.
“When we think Fed tapering is at bay for a while, the taste for yield continues and that contributes to a risk-on environment in the corporate-bond market,” Kathy Jones, a fixed-income strategist at Charles Schwab & Co. in New York, said in a telephone interview. “As long as the Fed provides a lot of liquidity to the market, it’s good for corporate issuers.”
The credit-swaps index typically drops as investor confidence improves and increases 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.
U.S. businesses added 200,000 new jobs in July, compared with a revised 198,000 gain in June, according to figures from Roseland, New Jersey-based ADP Research Institute. The median estimate of 40 economists surveyed by Bloomberg called for an increase of 180,000.
Gross domestic product, the value of all goods and services produced in the U.S., rose at a 1.7 percent annualized rate in the second quarter after a revised 1.1 percent gain in the prior period, according to a Commerce Department report in Washington. A Bloomberg survey of 85 analysts forecast annualized growth of 1 percent.
The Fed reiterated that reduction of asset purchases would depend on improvements in the economy, noting that “economic activity expanded at a modest pace during the first half of the year.”
“The market is getting comfortable with the fact that tapering will be gradual,” said George Rusnak, managing director of fixed-income strategies for Wells Fargo Private Bank in Philadelphia. “As people get more comfortable that it will not be a quick exit and it will be data dependent, then it makes sense to take on more credit risk as spreads compress.”
BMC is planning to market $1.05 billion of dollar-denominated bonds and 250 million euros ($331.7 million) of notes, both maturing in eight years, according to a person with knowledge of the transaction. The securities may be rated Caa1 by Moody’s Investors Service and may be sold next week, said the person, who asked not to be identified because terms aren’t set.
Proceeds from the information-technology provider’s sale will be used to help fund its purchase by a group led by Bain Capital LLC and Golden Gate Capital, according to the person.
The average relative yield on investment-grade debt widened 1 basis points to 128.9 basis points, according to prices compiled by Bloomberg.
The risk premium on the Markit CDX North American High Yield Index declined 1.5 basis points to 370.1 basis points, Bloomberg prices show.
The average relative yield on speculative-grade, or junk-rated, debt widened 4.3 basis points to 557.1 basis points, Bloomberg data show. High-yield, high-risk debt is rated below Baa3 by Moody’s and less than BBB- at Standard & Poor’s.