Company Credit-Default Swaps in U.S. Decline; Avon Risk Plunges

A gauge of U.S. corporate credit risk fell as investors awaited President Barack Obama’s State of the Union address.

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 2.1 basis points to a mid-price of 87.4 basis points at 4:30 p.m. in New York, according to prices compiled by Bloomberg.

Obama is due to deliver his State of the Union address at 9 p.m. in Washington. He will make proposals for spending on infrastructure, clean energy and education, according to an administration official briefed on the speech. Obama will argue that fostering economic growth is the best strategy to narrow a federal budget gap that has exceeded $1 trillion in each of the last four years.

“Investors will likely focus on the President’s plans to stoke economic growth but any major initiatives will be received with a mountain of salt as follow-through in Washington remains illusive,” Marc Pinto, head of corporate bond strategy at New York-based Susquehanna International Group LLP, said in an e-mail.

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.

Avon Swaps

The cost of protecting Avon Products Inc.’s debt from losses plunged after fourth-quarter profit topped estimates and the company said it would evaluate alternatives for its Silpada jewelery unit, which reported falling sales.

Five-year credit-default swaps on the New York-based company’s debt fell 121 basis points to 352 basis points as of 3:38 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 measure is the lowest in about seven months.

Chief Executive Officer Sheri McCoy, who took the helm of the world’s largest door-to-door cosmetics seller in April, said the company is cutting about 1,500 jobs and leaving the South Korea and Vietnam markets as part of a plan to save $400 million by the end of 2015.

‘Weak’ Covenants

The risk premium on the Markit CDX North American High Yield Index dropped 5.5 basis points to 439.3 basis points, Bloomberg prices show.

Covenant quality for high-yield debt deteriorated in January, a report from Moody’s Investors Service showed today. The decline resumes the erosion in quality for North American high-yield bonds, which began in July, the ratings company said.

“Investors are assuming more risk despite less yield, as average spreads to benchmark yields have tightened,” Alexander Dill, lead covenant analyst, wrote.

The average relative yield on speculative-grade or junk-rated debt fell 0.6 basis point to 502 basis points, according to Bloomberg data.

High-yield, high-risk debt is rated below Baa3 by Moody’s and less than BBB- at Standard & Poor’s. A basis point is 0.01 percentage point.

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