U.S. Company Credit Swaps Fall for Second Day; Dow Sells Bonds
A gauge of U.S. corporate credit risk dropped for a second day as Greek bonds rose and as American voters headed for the polls to elect the country’s next president.
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, declined 0.6 basis point to a mid-price of 96.3 basis points at 5:32 p.m. in New York, according to prices compiled by Bloomberg. The measure earlier touched as low as 95.9.
Greece’s 10-year bond yield dropped 63 basis points to 17.22 percent at 11:59 a.m. in New York on optimism international creditors will agree on an aid plan after European Union Economic and Monetary Affairs Commissioner Olli Rehn said a deal needs to be reached in the next week. An agreement may allay investor concern that the European debt crisis will weaken the global recovery and impair corporate balance sheets.
“My gut is you’ll have risk assets go to work after the election regardless of who wins,” Scott Carmack, a portfolio manager at Leader Capital Corp. in Portland, Oregon, said in a telephone interview.
The next president will need to address a so-called fiscal cliff of more than $600 billion in tax increases and spending cuts that take effect in 2013 unless Congress can reach a budget compromise.
Credit risk could increase if one party wins the presidency and another wins control of Congress, Stephen Antczak, Citigroup Inc.’s New York-based head of U.S. credit strategy, said in a telephone interview. “In that scenario the fiscal cliff becomes more of a challenge.”
The credit-swaps index typically falls 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 average relative yield for investment-grade bonds has fallen 1 basis point below the average cost to protect the debt with credit swaps, JPMorgan Chase & Co. strategists led by Eric Beinstein wrote in a Nov. 2 note to clients. It’s the first time average bond spreads have fallen below protection costs in 14 months, they said.
“We do not view this as a positive signal for bond markets,” the analysts wrote, saying the Federal Reserve’s commitment to buy $40 billion of bonds a month is driving yields on the debt lower while credit-swaps markets are reflecting a “more cautious” outlook.
Dow Chemical (DOW), the largest U.S. chemical company by sales, issued $2.5 billion of bonds in a two-part offering. The company sold equal amounts of 3 percent, 10-year securities to yield 145 basis points more than similar-maturity Treasuries and 4.375 percent, 30-year debt with a 160 basis-point spread, according to data compiled by Bloomberg.
The average relative yield on speculative-grade debt decreased 6 basis points, led by spreads on the bonds of utility companies, which narrowed 25 basis points.
Credit swaps tied to Hasbro Inc. (HAS) declined 13.2 basis points to 116.8 basis points, as of 3:30 p.m. in New York, according to data provider CMA, which is owned by McGraw-Hill Cos. and compiles prices quoted by dealers in the privately negotiated market.
The company’s stock rose the most intraday since July 23 as speculation surfaced that Walt Disney Co. may be talking to the maker of games such as “Magic: The Gathering” and “Monopoly” about a possible buyout.
“The company doesn’t comment on rumors or speculation,” Wayne Charness, a spokesman for Hasbro, said in a telephone interview.
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