U.S. Company Credit Swaps Little Changed Before June Fed Minutes
A measure of U.S. corporate credit risk was little changed before the Federal Reserve releases the minutes from its June policy meeting.
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, decreased 0.1 basis point to a mid-price of 82 basis points at 11:39 a.m. in New York, according to prices compiled by Bloomberg. The gauge closed yesterday at 81.7, the lowest level since June 7.
Investors are seeking further clarity of the central bank’s plans for its unprecedented stimulus measures when the Fed releases the minutes of its June 18-19 meeting at 2 p.m. in Washington today. Speaking after last month’s meeting, Chairman Ben S. Bernanke said the central bank may “moderate” its $85 billion of monthly bond purchases this year and end them by mid-2014 if growth in the world’s largest economy meets the Fed’s forecasts.
“People are waiting on the Fed, and you’ve seen the hedge position,” Noel Hebert, chief investment officer at Concannon Wealth Management, which oversees about $250 million of assets from Bethlehem, Pennsylvania, said in a telephone interview. “We’re just trying to test how markets fare with higher rates.”
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.
Southern Power Co. (SO) may issue $250 million of 30-year bonds, according to a person with knowledge of the offering. Proceeds from the sale will be used to repay debt and for general corporate purposes, said the person, who asked not to be identified because the terms aren’t set.
The risk premium on the Markit CDX North American High Yield Index rose 3 basis points to 405.1 basis points, Bloomberg prices show.
The average for Moody’s Investors Service’s covenant quality index for U.S. high-yield bond issuance fell to 3.72 in June from 3.99 in May, according to a report from analysts led by Alexander Dill yesterday. The reading, which measures covenant quality on a five-point scale with 5 signifying the weakest bondholder protection and 1 the strongest, is the lowest since 3.63 in December.
“With issuance down sharply in June and many companies postponing deals, those that went to market may have had to offer somewhat better covenant terms to a suddenly more discriminating market,” Dill wrote.
The average relative yield on speculative-grade, or junk-rated, debt fell 1.3 basis points to 554 basis points, Bloomberg data show. High-yield, high-risk debt is rated below Baa3 by Moody’s and less than BBB- at Standard & Poor’s.
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