Credit Swaps in U.S. Fall as Leading Indicators, Sentiment Rise

A gauge of U.S. corporate credit risk declined for the third time in four days as measures of consumer confidence and leading indicators climbed.

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 1.3 basis points to a mid-price of 70.3 basis points at 4:08 p.m. in New York, according to prices compiled by Bloomberg. The measure has declined 1.9 basis points this week.

The Thomson Reuters/University of Michigan preliminary index of consumer sentiment rose to 83.7 in May, the highest since July 2007, from 76.4 the month before, a report showed. A gauge of the U.S. economic outlook for the next three to six months climbed 0.6 percent in April after a revised 0.2 percent fall in March, the New York-based Conference Board said today. Signs that the economy is improving may reassure investors that companies will be able to repay their debts.

“The bear case is just getting squashed one by one,” Scott Carmack, a money manager at Leader Capital Corp. in Portland, Oregon, said in a telephone interview. “The Fed will probably start to withdraw quantitative easing by the end of this year or early next year, and I think they have enough ammunition to do it.”

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.

Tesla Offering

The risk premium on the Markit CDX North American High Yield Index fell 8.2 basis points to 340.6 basis points, Bloomberg prices show.

Electric-car maker Tesla Motors Inc. sold $600 million of convertible notes to help repay a U.S. loan, tapping the bond market for the first time.

The vehicle manufacturer run by billionaire Elon Musk issued 1.5 percent securities that may be swapped for shares at $124.52 each by June 2018, according to data compiled by Bloomberg. The stock closed at $91.50 in New York after almost tripling in price this year.

Petroleo Brasileiro SA, the Brazilian state-run oil producer, and drugmaker Merck & Co. led at least $54 billion of bond sales in the U.S. this week, the most in more than four months, as relative yields widened.

Weekly Sales

Petrobras raised $11 billion in the largest dollar-denominated deal by an emerging-market issuer, according to data compiled by Bloomberg. Whitehouse Station, New Jersey-based Merck sold $6.5 billion of debt in a six-part offering. Sales rose from last week’s $45.6 billion and compare with an average of $29.5 billion during the past 12 months.

The average relative yield on speculative-grade, or junk-rated, debt tightened 3.5 basis points to 487.2 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.