The cost to protect against losses on corporate bonds in the U.S. climbed to a more than six-week high as speculation swelled that the Federal Reserve will trim its bond purchases next month. Western Union Co. sold $250 million of two-year floating-rate notes.
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, rose 2.7 basis points to a mid-price of 84.3 basis points, according to prices compiled by Bloomberg. That’s the highest since July 5. The measure rose 6.1 basis points last week, the largest advance since the period ended June 21.
Signs that the recovery in the world’s largest economy is strengthening are increasing concern that the central bank will soon begin to pare its $85 billion of monthly bond buying that has supported credit markets. The yield on the 10-year Treasury note, a benchmark for interest rates, climbed to as high as 2.898 percent today, the most since July 2011.
“Investors are starting to get nervous about tapering,” said Andrew Brenner, head of international fixed income for National Alliance Capital Markets. There’s “no question that higher rates and lower Treasury bond prices are leading to wider spreads,” he said.
The Depository Trust & Clearing Corp., which runs a central repository for the market, reported $5.6 billion of credit swaps trades today on the current version of the CDX investment-grade index, according to data compiled by Bloomberg.
Credit swaps typically rise as investor confidence deteriorates and fall 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.
Contracts on Western Union climbed 8 basis points to a mid-price of 147 basis points, according to CMA, the data provider owned by McGraw Hill Financial Inc. that compiles prices quoted by dealers in the privately negotiated market.
The world’s biggest money-transfer business sold its floating-rate notes to yield 100 basis points more than the three-month London interbank offered rate, Bloomberg data show.
The average extra yield investors demand to hold dollar-denominated, investment-grade corporate bonds rather than similar-maturity Treasuries widened 0.9 basis point to 131.1 basis points, Bloomberg data show. The measure for speculative-grade, or junk-rated, debt climbed 0.7 to 564.8.
The risk premium on the Markit CDX North American High Yield Index, a credit-swaps benchmark tied to speculative-grade bonds, rose 16.2 basis points to 420.6, Bloomberg prices show.
Speculative-grade, or high-yield, high-risk debt, is rated below Baa3 by Moody’s Investors Service and less than BBB- at Standard & Poor’s.
In London, the Markit iTraxx Europe Index of 125 companies with investment-grade ratings rose 4.1 basis points to 103.1, Bloomberg prices show.