Corporate Credit Swaps in U.S. Rise as G-7 Finance Chiefs Meet

A gauge of U.S. corporate credit risk rose for a third day as investors considered the pace of stimulus measures while Group of Seven finance ministers and central bankers meet in the U.K.

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, added 1.2 basis points to a mid-price of 72.1 basis points at 4 p.m. in New York, according to prices compiled by Bloomberg. The gauge has risen from a more than five-year low of 68.9 basis points on May 7.

G-7 finance ministers started a two-day meeting in Aylesbury, north of London, today to discuss global financial issues ranging from Europe’s debt crisis to austerity policies. They may not release a formal communique, a Canadian Finance Department official said May 8. Investors are weighing the abilities of central banks to stimulate global economic growth amid years of interest-rate cuts and asset purchasing programs.

“If you want to consider whether easing is helping sustain markets, then yes, it’s working,” Noel Hebert, chief investment officer at Concannon Wealth Management, which oversees about $250 million of assets from Bethlehem, Pennsylvania, said in a telephone interview. “But it’s not doing anything for the real economy. Investors know there’s a problem but nobody can respond to them how they traditionally would because they can’t miss the trade.”

Bond Sales

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.

General Motors Co.’s finance unit and billionaire Warren Buffett’s Berkshire Hathaway Inc. led dollar-denominated sales of at least $42.1 billion this week, trailing $46.4 billion in the previous period.

General Motors Financial Co. sold $2.5 billion in its first issue in almost nine months while Berkshire Hathaway Finance Corp. raised $1 billion in its second sale this year, according to data compiled by Bloomberg.

Sales of investment-grade debentures declined to about $30.9 billion from last week’s $39.8 billion, while offerings of speculative-grade bonds reached at least $11.2 billion compared with $6.6 billion in the previous period.

The risk premium on the Markit CDX North American High Yield Index added 4.7 basis points to 350.2 basis points, Bloomberg prices show.

Default Risk

The high-yield measure may be understating default risk, John Lonski, chief economist of Moody’s Capital Markets Research Group, wrote in a note yesterday, saying the index should be “substantially higher” than the 337 basis points it reached May 8, based on the outlook for default rates.

“The corporate credit market senses that central banks will do whatever they can to prevent their respective economies from stalling,” Lonski wrote. “Nevertheless, the rally in high yield credit may abate soon in view of the flagging pace of global expenditures, as well as the benign but less than inspiring outlook for corporate credit quality.”

The average relative yield on speculative-grade, or junk-rated, debt tightened 1.8 basis points to 477 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.