U.S. Corporate Credit Swaps Fall; Bond Sales Reach Six-Week High

A gauge of U.S. corporate credit risk fell to the lowest level in about a week as manufacturing and consumer confidence data eased concern that automatic spending cuts set to begin today will curb economic growth.

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, declined 1.7 basis points to a mid-price of 86.3 basis points at 4:38 p.m. in New York, according to prices compiled by Bloomberg. That’s the lowest level since 85.4 on Feb. 19.

A report from the Institute for Supply Management showed that manufacturing activity in the country expanded to the highest level since June 2011. The ISM factory index increased to 54.2 in February from 53.1 the previous month, reducing concern that companies will struggle to repay debts in a faltering economy.

“The economic data provides confirmation that there is underlying strength and resilience in the economy and suggests we can absorb the effects of sequestration without suffering another recession,” Edward Marrinan, a macro credit strategist at RBS Securities, said in a telephone interview from Stamford, Connecticut.

Consumer sentiment among American households rose more than projected in February, the Thomson Reuters/University of Michigan final index showed today. The index, which climbed to 77.6 from 73.8 in January, was projected to match the preliminary reading of 76.3, according to the median estimate of 58 economists surveyed by Bloomberg.

Spending Cuts

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.

Democrats and Republicans are in a standoff over how to avert the cuts totaling $1.2 trillion over nine years, $85 billion of which would occur in the remaining seven months of this fiscal year. The cuts, also known as sequestration, are set to come into effect before midnight today.

The risk premium on the Markit CDX North American High Yield Index fell 8.7 basis points to 432.7 basis points, Bloomberg prices show.

Sales of company bonds in the U.S. rose to the highest level in six weeks, as relative yields on the debt widened.

Defaults Rise

Freeport-McMoRan Copper & Gold Inc., the world’s largest publicly traded copper producer, and Purchase, New York-based PepsiCo Inc. led offerings of at least $32.7 billion this week, up from $26.4 billion last week and the most since $53.3 billion in the five days ended Jan. 18, according to data compiled by Bloomberg.

The global default rate for high-yield bonds graded by Moody’s Investors Service rose to 2.6 percent at the end of 2012 from 1.9 percent a year earlier, according to a report from the ratings company. Defaults were concentrated in North America, with 44 issuers defaulting on $29 billion of debt.

The ratings firm forecasts defaults will end this year at 2.7 percent. “The monetary environment will remain accommodative in the near future,” Albert Metz, managing director of credit policy research at Moody’s, wrote in the report.

The average relative yield on speculative-grade, or junk-rated, debt rose 1.8 basis points to 508.6 basis points, data compiled by Bloomberg 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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