Credit Swaps in U.S. Decline; Bond Issuance Busiest Since May
A gauge of U.S. corporate credit risk declined for the fourth day after Federal Reserve Chairman Ben S. Bernanke called for maintaining stimulus measures. Bond issuance increased for the busiest day in almost two months.
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 4.3 basis points to a mid-price of 77.1 basis points, the lowest since May 30, according to prices compiled by Bloomberg.
Investors are trying to determine when the central bank may start trimming its $85 billion in monthly asset purchases, which have bolstered credit markets. Bernanke’s comments came after minutes from the Federal Open Market Committee’s June 18-19 gathering showed that about half of the 19 participants wanted to halt the buying by year-end.
“Highly accommodative monetary policy for the foreseeable future is what’s needed in the U.S. economy,” Bernanke said late yesterday in response to a question after a speech in Cambridge, Massachusetts.
The 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.
Bernanke “stressed that accommodative policy should persist given the state of the labor market and inflation, but he did not change his tune regarding tapering,” RBS strategists led by Edward Marrinan wrote in a report today. The Fed Chairman “reinforced the FOMC’s view that they will keep rates low for longer as the unemployment rate remains above the Fed’s target and inflation below.”
The minutes of the Fed’s June meeting also showed many officials would want to see more signs of job growth before starting to scale back stimulus measures.
First-time jobless claims rose 16,000 to 360,000 in the week ended July 6, according to figures released by the Labor Department today in Washington. The median forecast of 47 economists surveyed by Bloomberg called for a drop to 340,000. Claims are difficult to adjust in July for seasonal events such as vehicle plant shutdown and the Independence Day holiday, a Labor Department spokesman said as the data were released.
The swaps index has fallen from 86.6 on July 5, when the Labor Department reported the world’s largest economy added 195,000 jobs last month.
Companies from Best Buy Co. (BBY) to LyondellBasell Industries NV (LYB) led dollar-denominated bond offerings of at least $11.1 billion today, the busiest day for issuance since $13.3 billion on May 22 and above a 2013 daily average of $6.57 billion, Bloomberg data show.
LyondellBasell, the world’s largest producer of polypropylene, sold $1.5 billion in its first offering since June 2012.
The company issued $750 million each of 4 percent, 10-year debt to yield 160 basis points more than similar-maturity Treasuries and 5.25 percent, 30-year securities at a relative yield of 185 basis points, Bloomberg data show. Proceeds will be used for repurchasing shares and general corporate purposes, according to a person with knowledge of the transaction, who asked not to be identified, citing lack of authorization to speak publicly.
“Issuance has been pent up, and the overall market tone had been ugly,” Robert Grimm, head of corporate trading at Odeon Capital Group LLC in New York, said in a telephone interview. “Companies that were looking to raise money couldn’t do it, and now you have companies stepping in because they don’t want to miss out.”
Best Buy, the world’s largest consumer-electronics retailer, sold $500 million of five-year notes as it prepares to repay the same amount in debt due next week.
The 5 percent securities, the company’s first offering since 2011, pay a spread of 359.9 basis points, Bloomberg data show. Proceeds will be used to refinance debt, fund working capital or repurchase stock, Richfield, Minnesota-based Best Buy said today in a regulatory filing.
The risk premium on the Markit CDX North American High Yield Index fell 20.5 basis points to 381.1 basis points, the lowest since May 30, Bloomberg prices show.
Moody’s Investors Service lifted its forecast for the global speculative-grade default rate to 3.2 percent by year-end from a 3.1 percent estimate last month. The trailing 12-month rate rose in the second quarter to 2.8 percent from 2.5 percent the prior period, Moody’s said. The U.S. rate fell to 2.9 percent in the second quarter from 3 percent.
“Easy liquidity has, of course, kept the default rate low for some time,” Albert Metz, managing director of credit policy research at Moody’s in New York, said today in a statement. “If funding becomes tighter, we would expect an increase in the incidence of default.”
The average relative yield on speculative-grade, or junk-rated, debt fell 7.4 basis points to 552.1 basis points, Bloomberg data show. High-yield, high-risk debt is rated below Baa3 by Moody’s and less than BBB- at S&P.
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