U.S. Credit Swaps Fall as Investors See Continued Fed Presence

A gauge of U.S. corporate credit risk declined as investors wagered the Federal Reserve will continue its bond-buying program after the world’s largest economy grew less than forecast and consumer confidence fell.

The Markit CDX North American Investment Grade Index, a credit-default swaps benchmark used to hedge against losses or to speculate on creditworthiness, dropped 0.8 basis point to a mid-price of 78.3 basis points at 4:27 p.m. in New York, according to prices compiled by Bloomberg. That’s the lowest level since January 2010.

Gross domestic product rose at a 2.5 percent annual rate in the first three months of the year, lower than expected, after a 0.4 percent advance in the fourth quarter, Commerce Department figures showed today in Washington. The Thomson Reuters/University of Michigan final index of consumer sentiment declined in April to 76.4 from 78.6 a month earlier. The data may spur the Fed to continue purchasing $85 billion of Treasury and mortgage debt a month and maintain interest rates at near-zero levels.

“The market takeaway is that it keeps the Fed in play,” Anthony Valeri, a market strategist with LPL Financial LLC in San Diego, said in a telephone interview. “It keeps the search for yield intact, and with low default rates, the market’s comfortable taking that exposure.”

Extra Yield

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.

Fed policy makers have said they will maintain stimulus until the labor market improves “substantially.” The economy’s inability to sustain faster growth means central bankers will probably affirm a pledge to keep buying bonds when they meet next week. The Labor Department is scheduled to release its monthly jobs report on May 3.

“We recognize that the economy isn’t quite improving, despite some areas of promise, and as a result credit is still favored,” Jody Lurie, a corporate credit analyst at Janney Montgomery Scott LLC in Philadelphia, said in a telephone interview.

Morgan Stanley and Diageo Plc led borrowers in the U.S. selling at least $36 billion of bonds this week, the busiest in five periods, as relative yields narrowed.

New Issuance

The extra yield investors demand to own corporate bonds rather than government debentures fell to 212 basis points yesterday from 216 basis points on April 19, according to Bank of America Merrill Lynch index data. Yields decreased to a record-low 3.41 percent from 3.45 percent.

Issuers planning sales include CompuCom Systems Inc. with a $250 million offering of eight-year notes and Suzlon Energy Ltd. with a $650 million deal, Bloomberg data show.

The risk premium on the Markit CDX North American High Yield Index declined 2.4 basis points to 381.8 basis points, Bloomberg prices show. The gauge is poised for its lowest close since at least February 2009.

The cost to protect the debt of Freescale Semiconductor Ltd. sank the most in more than three months as the maker of chips used in cars, phone systems and electronics predicted second-quarter sales may exceed some analysts’ estimates.

Credit swaps linked to Freescale debt dropped 35.2 basis points to 523.9 basis points at 4:02 p.m., according to Bloomberg prices. That’s the biggest decline since Jan. 3 and means investors are paying the equivalent of $523,900 annually to protect $10 million of debt from losses for five years.

Freescale Revenue

Freescale, which is mostly owned by a private-equity group including Blackstone Group LP and TPG Capital, expects second-quarter revenue of $1 billion to $1.04 billion, according to a company statement. Analysts on average had estimated sales of $1.01 billion, Bloomberg data show.

The Austin, Texas-based company’s “results were generally better than consensus expectations, with growth in revenues but lower year-over-year margins,” JPMorgan Chase & Co. analysts Thomas Egan and Lina Kabaria wrote in a note today.

The average relative yield on speculative-grade, or junk-rated, debt widened 0.2 basis point to 524.3 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 and Poor’s.

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