Corporate Credit Swaps in U.S. Drop to Three-Year Low

A gauge of U.S. corporate credit risk dropped to a three-year low as more Americans signed contracts to buy previously owned homes last month.

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, fell 1.4 basis points to a mid-price of 76.8 basis points at 5:19 p.m. in New York, according to prices compiled by Bloomberg. The measure has declined for seven straight sessions, reaching the lowest level since January 11, 2010.

An index of pending home sales increased 1.5 percent in March after a revised 1 percent decline the previous month that was larger than initially reported, a release from the National Association of Realtors showed today in Washington. Economists forecast a 1 percent jump, according to the median estimate in a Bloomberg survey. Investors may use measures of the economic strength to gauge whether companies will struggle to repay their debt.

“It seems like people don’t really care about the macroeconomic or earnings environments,” Noel Hebert, chief investment officer at Concannon Wealth Management, which oversees about $250 million of assets from Bethlehem, Pennsylvania, said in a telephone interview. “We’re still in this game where people think central banks will keep printing money ad infinitum.”

McDonald’s Debt

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.

The European Central Bank will cut its benchmark interest rate to a record low of 0.5 percent on May 2, according to the majority of economists in a Bloomberg survey, while the Federal Reserve may consider renewing its commitment to bond-buying at a two-day meeting starting tomorrow.

Consumer spending in the U.S. climbed 0.2 percent in March after a 0.7 percent gain the month before, while incomes increased less than forecast and inflation cooled to the lowest level in more than three years.

McDonald’s Corp., the world’s largest restaurant chain by sales, plans to raise $500 million with a sale of 30-year bonds.

The company intends to issue the securities to fund general corporate purposes, according to a person familiar with the offering who asked not to be identified because terms aren’t set. McDonald’s debt is rated A2 by Moody’s Investors Service and an equivalent A at Standard & Poor’s.

J.C. Penney Swaps

The risk premium on the Markit CDX North American High Yield Index declined 11.9 basis points to 370.3 basis points, Bloomberg prices show.

The cost to protect against a default by J.C. Penney Co. declined as the retailer received a $1.75 billion term loan commitment from Goldman Sachs Group Inc. as it works to boost liquidity.

Credit swaps tied to Plano, Texas-based J.C. Penney’s debt declined 1.3 percentage points to 11.5 percent upfront at 3:13 p.m., according to CMA, the data provider owned by McGraw-Hill Cos. that compiles prices quoted by dealers. That means it would cost $1.15 million initially and $500,000 annually to protect $10 million of obligations.

The five-year loan will be secured by real estate and an interest in other assets of the retailer, J.C. Penney said today in a statement. The proceeds will be used for working capital and to discharge the company’s 7.125 percent notes due in 2023.

The average relative yield on speculative-grade, or junk-rated, debt tightened 3.9 basis points to 521 basis points, Bloomberg data show. High-yield, high-risk debt is rated below Baa3 by Moody’s and less than BBB- at S&P.