U.S. Credit Swaps Hold; Fed Says Economic Growth at Modest Pace

A gauge of U.S. corporate credit risk held at about a five-month low after the Federal Reserve said the economy was growing at a modest to moderate pace across most of the country.

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 0.3 basis point to a mid-price of 83.7 basis points as of 3:41 p.m. in New York, according to prices compiled by Bloomberg. Yesterday, the measure closed at 83.3, the least since Sept. 14.

“The majority of districts reported modest improvements in labor market conditions, although hiring plans were limited in several districts,” the central bank said in its Beige Book business survey, which is based on reports from the Fed’s 12 regional banks. “Residential real estate markets strengthened in nearly all districts and home prices rose amid falling inventories across much of the country.”

The anecdotal snapshot of the economy helps the Federal Open Market Committee evaluate whether the labor market shows signs of the substantial improvement it says would warrant shrinking or halting $85 billion in monthly bond purchases. The committee is scheduled to meet March 19-20.

“The main focus right now is on what the Fed is telling the market,” rather than on economic data, Jon Duensing, head of corporate credit at Smith Breeden Associates, said in a telephone interview from Boulder, Colorado. Investors are paying attention to the Fed’s commitment to provide liquidity, he said.

Staples Risk

American private companies hired 198,000 workers last month following a revised 215,000 gain in the prior month, data from the Roseland, New Jersey-based ADP Research Institute showed. The median forecast of 41 economists surveyed by Bloomberg projected an increase of 170,000. A separate report from the Commerce Department showed orders to U.S. factories fell in January.

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.

The cost to protect Staples Inc.’s debt from default increased after the world’s largest office-supplies chain forecast annual profit that was less than analyst estimates.

Five-year credit-default swaps on the company’s debt increased 20 basis points to 263 basis points as of 3:01 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.

Deere Bonds

The risk premium on the Markit CDX North American High Yield Index added 1.8 basis point to 418.6 basis points, Bloomberg prices show.

Deere & Co., the world’s largest agricultural-equipment maker, sold $1 billion of bonds through its finance unit in an offering of fixed- and floating- rate securities.

The average relative yield on speculative-grade, or junk-rated, debt fell 4.7 basis points to 492.4 basis points, data compiled by Bloomberg show.

High-yield, high-risk debt is rated below Baa3 by Moody’s Investors Service and less than BBB- at Standard & Poor’s.

Before it's here, it's on the Bloomberg Terminal.