U.S. Rate-Swap Spread Plummets to 19-Year Low; Markit CDX Falls
A measure of stress in U.S. credit markets reached the lowest level in 19 years as economic data and company earnings surpassed estimates.
The U.S. two-year interest-rate swap spread narrowed 1.3 basis points to 9.45 basis points, as of 5 p.m. in New York, according to data compiled by Bloomberg.
That’s the lowest level since Sept. 28, 1993, for the measure, which falls when investors favor assets such as corporate bonds and rises when they seek the perceived safety of government securities. The gauge has declined from 39.13 basis points in May.
Industrial production increased 0.4 percent in September, more than the 0.2 percent median estimate of analysts polled by Bloomberg, curbing concern that the economic recovery is weakening and bolstering confidence in companies’ ability to repay obligations. Goldman Sachs Group Inc., the fifth-biggest U.S. bank by assets, reported third-quarter net income of $1.51 billion, or $2.85 per share, beating the $2.28 per share average estimate in a Bloomberg survey.
The credit market is less risky today because of “positive earnings plus positive reaction to Citigroup’s announcement” that Vikram Pandit had resigned as chief executive officer, John Donaldson, director of fixed income at Radnor, Pennsylvania- based Haverford Trust Co., said in a telephone interview.
The Markit CDX North America Investment Grade Index, a credit-default swaps benchmark that investors use to hedge against losses or to speculate on creditworthiness, fell 3.2 basis points to a mid-price of 92.5 basis points, according to prices compiled by Bloomberg. That’s the lowest level since Sept. 19, the day before the index changed to a new version.
The credit-swaps index typically declines as investor confidence improves and rises 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.
The narrowing of the interest-rate swap has been “driven mostly by declines in Libor,” Neela Gollapudi, a New York-based director of interest-rate strategy at Citigroup Inc., said in a telephone interview, referring to the London interbank offered rate, the level where banks say they can borrow from each other.
Three-month Libor fell to 0.33 percent from 0.58 percent in January, Bloomberg data show.
“It’s difficult to say if this trend is going to keep continuing,” Michael Chang, an interest-rate strategist at Credit Suisse Group AG, said in a telephone interview. “You could get a spike in Libor at any time if you get a shock coming out of Europe.”
HCA Holdings Inc. (HCA), the biggest U.S. for-profit hospital operator, is planning to sell $2 billion of bonds maturing in 2023 in its second offering this year. The company plans to issue $1 billion of senior secured notes to yield from 4.75 percent to 4.875 percent and $1 billion of senior unsecured notes to yield from 5.75 percent to 5.875 percent, according to a person familiar with the transaction, who asked not to be identified because terms aren’t set.
The average relative yield of speculative-grade debt fell 5 basis points, led by the spreads on bonds of utility companies, which narrowed 9 basis points. The average relative yield on investment-grade debt decreased 2 basis points.
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