Credit Swaps in U.S. Little Changed as Fisher Questions Stimulus
A gauge of U.S. corporate debt risk was little changed after Federal Reserve Bank of Dallas President Richard Fisher said global central banks may not have the capacity for more stimulus.
The Markit CDX North America Investment Grade Index, a credit-default swaps benchmark used to hedge against losses on corporate debt or to speculate on creditworthiness, decreased 0.3 basis point to a mid-price of 103 basis points at 3:15 p.m. in New York, according to prices compiled by Bloomberg. Contracts tied to Dean Foods Co. (DF) were poised to fall by the most on record after its WhiteWave unit filed for a public offering.
Investors have speculated that central banks will unleash new stimulus to shore up a weakening global economy that may weigh on companies’ balance sheets and hamper their ability to repay debt. Fisher, who doesn’t have a vote on the policy- setting Federal Open Market Committee this year, said today in an interview on “Bloomberg Surveillance” with Tom Keene and Sara Eisen that the private sector must take the next steps to boost growth to avoid “overburdening the central banks.”
Fisher’s opposition to more stimulus is “consistent” with comments he has made before and has already been digested by credit investors, Zane Brown, a fixed-income strategist at Lord Abbett & Co. in Jersey City, New Jersey, said in a telephone interview. The economy is “certainly not as strong as any of us would like it to be, certainly not as strong as the Fed would like it to be, but it doesn’t guarantee that the Fed is going to pursue” large-scale debt purchases, he said.
Fed Chairman Ben S. Bernanke said last month the central bank was ready to deliver more stimulus, including possible quantitative easing, if economic conditions fail to improve. European Central Bank President Mario Draghi is seeking to buy sovereign bonds and slow rising borrowing costs in Spain and Italy, a plan that Bundesbank President Jens Weidmann has opposed, even as the German government gives it backing.
The policy impasses and the “wait-and-see approach with Spain and Italy” will create further “volatility going forward” in financial markets and the euro-area economy, Adrian Helfert, a Boulder, Colorado-based senior vice president at Smith Breeden Associates who helps oversee $6.4 billion, said in a telephone interview.
Data today showed German exports dropped more than economists had estimated in June, slipping 1.5 percent, as the Bank of England cut its forecast for economic growth to about 2 percent in two years, down from a projection of 2.5 percent in May.
Relative yields on U.S. corporate bonds from the most creditworthy to the riskiest borrowers dropped to the lowest level in a year yesterday, according to the Bank of America Merrill Lynch U.S. Corporate & High Yield Master index.
The extra yield investors demand to hold company debt rather than U.S. Treasuries dropped 2 basis points to 268 basis points, or 2.68 percentage points, the lowest since the measure reached 261 basis points on Aug. 3, 2011, index data show.
“Despite all of the negative news that we’re getting in Europe, riskier product in the form of lower quality bonds, both lower quality tiers of investment grade and below investment- grade bonds, are actually holding up quite well in the United States,” Brown said. “Investors are looking at the U.S. differently than they are looking at Europe.”
The default premium on the Markit CDX North America High Yield Index, a measure of U.S. speculative-grade corporate debt risk, dropped 6 basis points to a mid-price of 547.5 basis points at 3:36 p.m. in New York, Bloomberg prices show.
Dean Foods CDS
The cost to guard against losses on the debt of Dean Foods dropped 81.3 basis points, the biggest plunge in figures dating back to November 2007, to a mid-price of 486.3 basis points at 3:38 p.m. in New York, Bloomberg prices show.
Dean, the largest U.S. dairy processor, plans to use proceeds from WhiteWave’s planned $300 million IPO to pay down some of its $3.6 billion in debt outstanding as of June 30, according to a filing from the Dallas-based company after the close of equity trading yesterday. The $300 million price is a placeholder used to calculate registration fees and may change.
The credit-default swaps gauge typically falls as investor confidence improves and rises as it deteriorates. Credit swaps 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.
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