Credit Swaps in U.S. Post Biggest Weekly Decline Since JanuaryScott Harrison
A gauge of U.S. corporate credit risk posted its biggest weekly decline since the start of the year as Federal Reserve Chairman Ben S. Bernanke reassured investors the central bank will maintain “highly accommodative” policy that has bolstered debt markets.
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, has dropped 8.6 basis points since July 5 to a mid-price of 78 basis points as of 4:32 p.m. in New York, the most since the week ended Jan. 4, according to prices compiled by Bloomberg. The gauge reached 77.1 yesterday, the lowest since May 30.
Bernanke’s July 10 comments helped ease concern that the Fed is preparing for a sooner-than-expected pullback from unprecedented stimulus measures that pushed company bond yields to record lows. After the CDX index surged to a six-month high of 97.6 basis points on June 24 and investors pulled cash from funds that buy corporate debt, buyers found better value in bond markets this week, according to Barclays Plc strategists.
“We are as positive on credit risk as we have been all year,” the strategists, led by Jeffrey Meli and Bradley Rogoff in New York, wrote in a note to clients today. “The backup has created opportunities within credit that we expect to normalize in a modest rally.”
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.
Rebounding sentiment helped trigger a surge in corporate-bond sales in the U.S. to the fastest pace in seven weeks, reaching at least $23 billion in the past five days, according to data compiled by Bloomberg.
General Electric Co., the largest maker of jet engines, raised $3.5 billion in three parts and Richfield, Minnesota-based Best Buy Co. issued $500 million in its first sale since 2011, the data show. Weekly offerings rose from $1.3 billion last week, the slowest this year, and were the most since $36.8 billion for the period ended May 24.
The extra yield investors demand to own corporate bonds rather than government debentures fell to 230 basis points yesterday from 236 basis points on July 5, according to Bank of America Merrill Lynch index data. Yields decreased to 4.13 percent from 4.3 percent, and compare with a record low 3.35 percent on May 2, index data show.
Bernanke, in response to a question after a speech in Cambridge, Massachusetts, said “highly accommodative monetary policy for the foreseeable future is what’s needed in the U.S. economy.”
The comments helped reverse an increase in Treasury yields earlier that day following the release of minutes from the Federal Open Market Committee’s June 18-19 meeting that showed about half of the participants wanted to halt the Fed’s $85 billion in monthly asset purchases by year-end.
Volatility in Treasuries measured by the Merrill Lynch Option Volatility Estimate MOVE Index dropped to 93.54 yesterday, the lowest since June 19. It climbed to 117.89 on July 5, the most since December 2010.
“Generally, the feeling is that there will be tapering at some point, it’s just not clear at the moment whether tapering is as imminent based on Bernanke’s comments,” Michael Kraft, a senior portfolio manager at Vanderbilt Asset Management in New York, said in a telephone interview.
The risk premium on the Markit CDX North American High Yield Index has dropped 56.1 basis points this week to 375.9, the biggest weekly decline since the period ended Jan. 4, Bloomberg data show.
Standard & Poor’s revised its global corporate default tally for 2013 to 47. Of the 47 defaults this year, 27 are based in the U.S., the ratings company said in a report today.
The average relative yield on speculative-grade, or junk-rated, debt fell 2.8 basis points to 549.3 basis points, Bloomberg data show. High-yield, high-risk debt is rated below Baa3 by Moody’s Investors Service and less than BBB- at S&P.
“A lot of us are trying to think about how to position ourselves by year-end,” Mirko Mikelic, a senior portfolio manager at Fifth Third Asset Management in Grand Rapids, Michigan, said in a telephone interview. “The market is trying to find that medium-term plan for rates.”