Credit Swaps Fall to More Than 5-Year Low in U.S. on Jobs Data

A gauge of U.S. corporate credit risk declined to the lowest level in more than five years as employment increased more than forecast in April.

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, decreased 2.9 basis points to a mid-price of 71.4 basis points at 4:04 p.m. in New York, according to prices compiled by Bloomberg. The index is closing at the lowest level since Nov. 6, 2007, when it reached 68.8.

Payrolls expanded by 165,000 workers last month following a revised 138,000 increase in March that was larger than first estimated, Labor Department figures showed today in Washington. The median forecast of 90 analysts surveyed by Bloomberg projected a 140,000 gain. The jobless rate fell to 7.5 percent, the lowest level since December 2008, from 7.6 percent in March. Improving economic data may ease investor concern that companies will struggle to repay debt.

“The market had gotten to a spot where expectations were lower than the survey number,” Jon Duensing, head of corporate credit at Smith Breeden Associates, said in a telephone interview from Boulder, Colorado. “Not only was the headline number positive but the revisions were higher as well, and that’s supporting today’s positive price action.”

Credit Floor

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.

Orders placed with U.S. factories fell 4 percent in March, the biggest drop since August, following a revised 1.9 percent gain the prior month that was smaller than previously estimated, the Commerce Department reported today in Washington. The median forecast of 58 analysts in a Bloomberg survey predicted orders would fall by 2.9 percent.

The risk premium on the Markit CDX North American High Yield Index fell 6.8 basis points to 351.8 basis points, Bloomberg prices show.

The average relative yield on speculative-grade, or junk-rated, debt tightened 10.3 basis points to 495.8 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.

“CDX indices have outperformed equities in the last couple of weeks and look too tight in that perspective,” JPMorgan Chase & Co. analysts led by Eric Beinstein said in a note yesterday. “Still, it remains true that credit has a floor and equities don’t have a ceiling, in our view.”

Apple Swaps

Apple Inc., International Business Machines Corp. and Texas Instruments Inc. led dollar-denominated bond sales of $43 billion in the busiest week this year for high-grade technology companies as relative yields narrowed.

Apple kicked off the rush of issuance when it announced on April 23 that it was planning to raise debt for the first time in almost two decades to help fund a $100 billion capital reward for shareholders. Microsoft Corp., the world’s largest software maker, came to market later that week with a $2.67 billion offering in euros and dollars. That was followed by a $1 billion issue from Texas Instruments and a $2.25 billion offering from IBM, which obtained record-low coupons on its first sale in three months.

Record Coupons

Five-year credit swaps tied to Apple’s debt eased 0.7 basis point to 26 basis points as of 3:25 p.m., according to data provider CMA, which is owned by McGraw Hill Financial and compiles prices quoted by dealers in the privately negotiated market. That means it would cost the equivalent of $26,000 annually to protect $10 million of obligations for five years.

The largest U.S. maker of smartphones set a record for the biggest corporate bond sale ever with its $17 billion six-part offering on April 30, Bloomberg data show. Orders for the Apple sale totaled $52 billion, according to a person familiar with the transaction, who asked not to be identified citing lack of authorization to speak publicly.

“There’s still tremendous demand for spread fixed-income assets,” Duensing said. “The reported order book behind Apple’s recent new issuance supports that demand.”

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