U.S. Company Credit Swaps Rise as Investors Seek Clues From Fed

A gauge of U.S. corporate credit risk rose from the lowest level in almost two weeks as investors await Federal Reserve Chairman Ben S. Bernanke’s congressional testimony this week and minutes of the central bank’s April 30 - May 1 meeting.

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 0.7 basis point to a mid-price of 71 basis points at 4:18 p.m. in New York, according to prices compiled by Bloomberg. The index, which ended last week at the lowest since May 8, typically rises as investor confidence deteriorates and falls as it improves.

Derivatives traders will examine minutes of the Fed’s latest meeting for clues about when the central bank may reduce stimulus that has been bolstering liquidity and demand in credit markets. The Fed, which releases the minutes May 22, the same day Bernanke is scheduled to testify before Congress, currently purchases $85 billion of Treasury and mortgage debt each month.

“A lot of the uplift in the market has been attributed by investors to central banks’ actions,” Marc Pinto, head of corporate bond strategy at Susquehanna International Group LLP in New York, said in a telephone interview. “Therefore as the Fed in particular starts to change course, investors are going to be looking at that very closely. Any words uttered by Ben Bernanke are going to be scrutinized.”

Tapering Purchases

San Francisco Fed President John Williams said on May 16 the central bank may start tapering its bond purchases as soon as this summer and end the program late this year amid an improved labor market. Two days earlier, Philadelphia Fed President Charles Plosser said the U.S. central bank should start to curtail its purchases as early as its next gathering, scheduled for June 18-19.

While there are calls for immediate tapering, “the hurdles still appear to be quite high,” RBS Securities Inc. analysts led by Edward Marrinan wrote in a note today. “As such, we don’t expect any asset purchase adjustments, in either direction until late 2013.”

CF Industries Holdings Inc., the largest U.S. maker of nitrogen fertilizer, sold $1.5 billion of debt in its first offering in more than three years.

The company issued equal, $750 million portions of 3.45 percent, 10-year notes that yield 150 basis points more than similar-maturity Treasuries and 4.95 percent, 30-year securities at a relative yield of 180 basis points, according to data compiled by Bloomberg. Proceeds will be used to fund capacity expansion projects, working capital and for other general corporate purposes, including stock repurchases, the Deerfield, Illinois-based company said today in a statement.

Junk Risk

The risk premium on the Markit CDX North American High Yield Index added 3 basis points to 344.3 basis points, Bloomberg prices show.

Credit swaps 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.

JPMorgan Chase & Co. and Barclays Plc lifted their forecasts for U.S. junk-bond returns amid suppressed borrowing costs for even the least creditworthy of issuers.

Barclays analysts predict high-yield bonds may gain 8 percent in 2013, as much as four percentage points more than their original expectation, strategists led by Jeffrey Meli and Bradley Rogoff said in a May 17 report. JPMorgan sees “modest upside risk to our original full-year return forecast of 7 to 8 percent for U.S. high yield” and now expects gains of as much as 10 percent, according to strategists led by Jan Loeys.

The average relative yield on speculative-grade, or junk-rated, debt eased 0.4 basis point to 485.2 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.