A gauge of U.S. company credit risk declined for the fourth day, reaching a six-year low, after data showed consumer spending rose in November by the most in five months.
The Markit CDX North American Investment Grade Index, a credit-default swaps benchmark used to hedge against losses or to speculate on creditworthiness, fell 1.7 basis points to 62.9 basis points, the lowest level since October 2007, according to prices compiled by Bloomberg. The extra yield investors demand to hold investment-grade corporate bonds rather than government debt narrowed 1.7 basis points to 114.7, Bloomberg data show.
Signs of a firming economy are bolstering the outlook for credit, with the default-swaps benchmark’s decline today following a 5.5 basis-point drop last week, the biggest in about two months. Household purchases, which account for almost 70 percent of the economy, rose 0.5 percent to match the median forecast of 76 economists, the Commerce Department reported today in Washington.
“There’s less risk across credit products” as consumers spend more, said Mark Pibl, the New York-based head of U.S. fixed-income research at Canaccord Genuity. “We’re calling for credit spreads to tighten in the new year even if interest rates rise.”
The Markit CDX benchmark, which typically falls as investor confidence improves and rises as it deteriorates, has averaged 79.6 basis points this year. 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.
The risk premium on the Markit CDX North American High Yield Index, tied to the debt of 100 speculative-grade companies, decreased 8.6 basis points today to 310.2, extending a drop from 340 on Dec. 17, Bloomberg prices show. High-yield, high-risk bonds are rated below Baa3 by Moody’s Investors Service and less than BBB- at Standard & Poor’s. A basis point is 0.01 percentage point.