Credit Swaps in U.S. Rise Most Since June; Caesars Risk Eases
A gauge of U.S. company credit risk recorded the biggest weekly rise in almost two months amid concern the Federal Reserve may start curbing stimulus later this year. The cost to protect against a default by Caesars Entertainment Corp. (CZR) dropped.
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, added 2.5 basis points this week to a mid-price of 75.2 at 4:32 p.m. in New York, according to prices compiled by Bloomberg. That’s the largest increase for a comparable five-day period since the measure climbed 9.9 basis points in the period ended June 21.
The Fed is debating when to start trimming $85 billion in monthly bond buying that has kept borrowing costs low and bolstered credit markets. Four central bank officials indicated this week greater willingness to begin paring the Fed’s debt-purchasing program, citing confidence the economy is strengthening.
“Tapering has to be on investors’ minds,” Robert Grimm, head of corporate trading at Odeon Capital Group LLC in New York, said in a telephone interview. “Everybody thinks that is the big elephant in the room. It’s going to happen but it’s only a question of when and how quickly.”
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.
Caesars credit risk declined after the company agreed to sell a piece of land in Macau to Pearl Dynasty Investments Ltd. for $438 million, according to a regulatory filing.
Credit swaps tied to the debt of Caesars fell 1.1 percentage points to 54.2 percent upfront, according to data provider CMA, which is owned by McGraw Hill Financial Inc. and compiles prices quoted by dealers in the privately negotiated market. That’s in addition to 5 percent a year, meaning it would cost $5.42 million initially and $500,000 annually to protect $10 million of Caesars’s bonds for five years.
Las Vegas-based Caesars expects net proceeds of about $420 million from the sale, which it will use to fund capital expenditures or buy back outstanding debt obligations, it said in the filing.
The trailing 12-month global speculative-grade default rate rose to 2.9 percent in July from 2.8 percent the prior month, according to a report by Moody’s Investors Service dated yesterday.
Moody’s forecasts the figure to end 2013 at 3 percent before falling to 2.5 percent in July 2014, the report said. Forty-three corporate issuers have defaulted this year.
Dallas Fed President Richard Fisher said this week that it’s timely for U.S. central bankers to begin moderating record monetary stimulus as the economy continues to improve. Chicago Fed President Charles Evans said he wouldn’t rule out a decision to start dialing back the purchases at the Sept. 17-18 Federal Open Market Committee meeting.
The default premium on the Markit CDX North American High Yield Index, a measure of speculative-grade corporate debt risk, rose 16.9 basis points this week to 379.2 basis points, the biggest climb since 48.6 basis points in the period ended June 21, Bloomberg prices show. A basis point is 0.01 percentage point.
The average relative yield investors demand to hold investment-grade corporate bonds rather than similar-maturity Treasuries increased 1.3 basis points to 129.2 basis points, Bloomberg data show. The measure for speculative-grade debt widened 0.1 basis point to 567.2 basis points.
High-yield, high-risk debt is rated below Baa3 by Moody’s and less than BBB- at Standard & Poor’s.
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