U.S. Credit Swaps Rise as Traders Shift to New Benchmark

A benchmark gauge of corporate credit risk increased as banks, hedge funds and other money managers moved trades into a new version of the credit-default swaps index.

Series 20 of the Markit CDX North American Investment Grade Index, used to hedge against losses on company debt or to speculate on creditworthiness, traded at 89.4 basis points, 7.6 basis points higher than where Series 19 ended yesterday, according to data compiled by Bloomberg.

“In the U.S., things are going according to what we expected, in line with the fair value,” Dominique Toublan, a credit strategist at JPMorgan in New York, said today in a telephone interview.

New versions of Markit Group Ltd.’s indexes are created every six months. Companies are replaced if they no longer have appropriate credit grades, aren’t among the most actively traded borrowers or fail to meet other criteria. Block Financial LLC and Genworth Financial Inc. were added to the new version while Canadian Natural Resources Ltd. and CenturyLink Inc. were removed.

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.

New Rule

The new series should trade 9 basis points wider than the old benchmark, based on the cost of the individual credit swaps on companies in each index, according to JPMorgan Chase & Co. analysts.

Most of the difference in levels between the two series is due to the change in maturity on the new contracts, Toublan said. Five-year contracts on Series 20 expire in June 2018, while the old index matures in December 2017.

Markit also added an index rule prohibiting constituents with greater than five times the average 90 basis-point spread of the investment-grade gauge from inclusion, a measure aimed at promoting liquidity, spokeswoman Caroline Lumley said in an e-mail.

Stryker Corp., the second-largest seller of orthopedic devices, issued $1 billion of bonds in its first offering in about 18 months. The company sold $400 million of 4.1 percent debt due April 2043 at a spread of 100 basis points more than similar-maturity Treasuries and $600 million of 1.3 percent notes due April 2018 at a relative yield of 60 basis points, Bloomberg prices show. The proceeds are expected to be used for working capital, acquisitions and stock repurchases, according to a company filing.

High Yield

The company last sold debt in September 2011, issuing $750 million of 2 percent, five-year debentures to yield 115 basis points more than benchmarks, the data show. The bonds traded at 104.1 cents on the dollar to yield 0.83 percent on March 7, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.

The risk premium on the Markit CDX North American High Yield Index dropped 8.2 basis points to 394.3 basis points, Bloomberg prices show. Series 20 of the high-yield gauge is set to begin trading on March 27.

The Federal Reserve will maintain its $85 billion in monthly bond buying even as the U.S. economy and job market show signs of improvement, the Federal Open Market Committee said today at the conclusion of a two-day meeting in Washington. The Fed also left unchanged its statement that it plans to hold its target interest rate near zero as long as unemployment remains above 6.5 percent and inflation is projected to be no more than 2.5 percent.

Bond Buying

Chairman Ben S. Bernanke said today that the Fed is monitoring the situation in Cyprus, where lawmakers rejected a levy on bank deposits intended to defray the cost of a rescue package yesterday. The central bank does not see a “major risk to the U.S. financial system or the U.S. economy,” Bernanke said in a news conference.

“The Cyprus thing at least makes people scratch their heads a little bit, but the market still looks at that as though it couldn’t happen anywhere else,” John Donaldson, director of fixed income at Haverford Trust Co., said in a telephone interview from Radnor, Pennsylvania.

The average relative yield on speculative-grade, or junk-rated, debt tightened 1.5 basis points to 492.5 basis points, Bloomberg data show. High-yield, high-risk debt is rated below Baa3 by Moody’s Investors Service and less than BBB- at Standard & Poor’s.

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