U.S. Company Credit Swaps Climb; Ford Issues $2 Billion of Bonds
A gauge of U.S. corporate credit risk rose after Federal Reserve policy makers said they will probably end their $85 billion monthly bond purchases sometime in 2013.
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, climbed 0.6 basis point to a mid-price of 85.7 basis points at 5:04 p.m. in New York, according to prices compiled by Bloomberg.
Minutes from the Federal Open Market Committee’s Dec. 11-12 gathering released today in Washington showed a divide among participants on how long the purchases should last, stoking investor concern that a reduction of economic stimulus might make it more difficult for companies to repay debt obligations. The central bank’s comments offset a private survey based on payrolls that showed the biggest gain in employment in 10 months in December.
“Markets are very disappointed, because they thought they had the low rate policy plus quantitative easing ad infinitum,” Noel Hebert, chief investment officer at Bethlehem, Pennsylvania-based Concannon Wealth Management, said in a telephone interview. “The important thing is that the cessation of QE has a lot to do with prognostications of when we accelerate into a sustainable growth path. If by mid-year growth looks tepid, you’re just going to get a renewal of a more dovish tone from the Fed.”
Earlier, the index fell as low as 84 basis points as companies added 215,000 workers last month, the Roseland, New Jersey-based ADP Research Institute showed today. The increase was the largest since February and followed a revised 148,000 gain in November that was larger than initially reported.
Applications for jobless benefits rose 10,000 to 372,000 in the week ended Dec. 29, the Labor Department showed today in Washington. Economists forecast 360,000, according to the median estimate in a Bloomberg survey.
“The ADP report easily trumped the weekly initial claims,” Andrew Wilkinson, senior market analyst at Miller Tabak & Co. in New York, said in a telephone interview. “Nobody was forecasting strength into the end of the year, and yet we got two very strong reports in November and December.”
The credit-swaps index typically rises as investor confidence deteriorates and falls 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.
Ford Motor Co. (F), the second-largest U.S. automaker, sold $2 billion of bonds in its first sale of fixed-rate debt maturing in at least 30 years since 1999. The 4.75 percent securities due January 2043 were priced to yield 180 basis points more than similar-maturity Treasuries, according to data compiled by Bloomberg. Proceeds from the sale will be used to refinance debt and to fund its pension plan. The notes may be rated Baa3, the lowest level of investment grade, by Moody’s Investors Service.
The risk premium on the Markit CDX North American High Yield Index climbed 5.8 basis points to 444.4 basis points, according to Bloomberg prices.
Credit swaps protecting against losses on the debt of Kohl’s Corp. (KSS) for five years rose 13.9 basis points to 263.9 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 third-largest U.S. department store chain reported a 3.4 percent rise in same-store sales, compared with an average projection for a 1.3 percent gain. The retailer also cut its fourth-quarter earnings forecast to as much as $1.62 a share, from a maximum of $2.08 a share. Analysts surveyed by Bloomberg estimated $1.89, on average.
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