U.S. Credit Swaps Index Rises as Cyprus Obtains BailoutVictoria Stilwell
A gauge of U.S. corporate credit risk rose as Cyprus reached an agreement with international creditors on a rescue package to prevent a default.
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, rose 0.7 basis point to a mid-price of 91.1 basis points at 4:15 p.m. in New York, according to prices compiled by Bloomberg.
Cyprus agreed to shrink its banking system in order to obtain a 10 billion euro ($13 billion) bailout. Finance ministers from the 17-member euro region ratified the country’s accord with the European Central Bank, the European Commission and the International Monetary Fund that will help Cyprus dodge a disorderly default and potential exit from the euro. Investors are concerned the deal may become a template used for other distressed nations.
“These are good headlines, but the underlying tone suggests this is a small example of a bigger problem that still exists,” Timothy Cox, executive director of debt capital markets at Mizuho Securities USA Inc. in New York, said in a telephone interview. “These are warning signs. People have a keen eye on the immediate impact of the Cyprus situation for that reason.”
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.
GE Capital Corp., the finance unit of General Electric Co., raised $1.4 billion with a two-part sale of five-year debt. The company issued $1 billion of 1.625 percent bonds that pay 90 basis points more than similar-maturity Treasuries and $400 million of floating-rate securities yielding 71 basis points more than the three-month London interbank offered rate, according to data compiled by Bloomberg.
The unit’s $4 billion of 5.625 percent securities due May 2018 traded at 118.5 cents on the dollar to yield 1.8 percent on March 21, 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 rose 3.5 basis points to 400.5 basis points, Bloomberg prices show.
The average relative yield on speculative-grade, or junk-rated, debt added 2 basis points to 497.5 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.