U.S. Company Credit Swaps Fall; Ally Plans $1.375 Billion Bonds

A gauge of U.S. corporate credit risk fell as Citigroup Inc. reported better-than-estimated earnings. Auto lender Ally Financial Inc. is planning to sell $1.375 billion of bonds.

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

0.9 basis point to a mid-price of 77.1 basis points at 4:31 p.m. in New York, according to prices compiled by Bloomberg. That’s the lowest closing level since 76.3 on May 30.

Credit investors are looking to financial results for signs of the strength of the economic recovery and borrowers’ ability to repay debt. Citigroup, the third-largest bank by assets, posted adjusted earnings of $1.25 a share for the second quarter, beating the $1.18 average estimate of 27 analysts surveyed by Bloomberg News.

U.S. retail sales increased 0.4 percent in June, following a 0.5 percent rise in May, Commerce Department figures showed today in Washington. A survey of economists by Bloomberg called for a 0.8 percent advance.

“People are more comfortable with the Fed going forward. As a result of today’s retail sales, you might see the Fed revise its gross domestic product forecasts” lower, Matthew Duch, who helps oversee $12 billion as a money manager at Calvert Investments Inc. in Bethesda, Maryland, said in a telephone interview.

‘Data Driven’

The credit-swaps measure 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.

Federal Reserve Governor Daniel Tarullo, who has always voted in favor of bond purchases by the Fed, said today that any reduction in the central bank’s asset buying would be “data driven” and “dependent on the economy.”

“Good reports from the banks so far, Bernanke’s comments last week, and enough data points to see the economy is very slowly improving, which limits the amount and timing of tapering one would expect from the Fed,” Joel Levington, managing director of corporate credit research at Brookfield Investment Management Inc. in New York, wrote in an e-mail.

Ally Offering

Ally and Canadian Imperial Bank of Commerce led borrowers planning debt sales.

Ally, the auto lender majority-owned by U.S. taxpayers, intends to sell $1 billion of fixed-rate, three-year securities to yield 3.5 percent and $375 million of floating-rate notes yielding 268 basis points more than the three-month London interbank offered rate, according to a person with knowledge of the offering. The Detroit-based lender has been pursuing asset sales as it seeks an initial public offering to help repay a $17.2 billion bailout.

Proceeds from the sale may be used to redeem outstanding notes, said the person, who asked not to be identified because terms aren’t set.

Canadian Imperial Bank sold $1.5 billion of debt in two parts, according to data compiled by Bloomberg. The company issued $750 million in three-year, floating-rate securities yielding 52 basis points more than Libor and an equal portion of

1.35 percent, three-year notes to yield 72 basis points more than similar-maturity Treasuries.

Smithfield Swaps

The risk premium on the Markit CDX North American High Yield Index, fell 6 basis points to 370.8 basis points, Bloomberg prices show. That’s the lowest level on a closing basis since it reached 369.8 on May 27.

Default swaps tied to the debt of Smithfield Foods Inc., the hog processor being acquired by Shuanghui International Ltd., increased the most in more than three weeks as Moody’s Investors Service said it will review the credit rating of the Smithfield, Virginia-based pork producer for possible downgrade.

The cost to protect the company’s debt from default for five years rose 31 basis points to 328 basis points, according to data provider CMA, which is owned by McGraw Hill Financial Inc. and collects prices quoted on the privately negotiated market. That’s the largest intraday increase since climbing 61 basis points June 20.

Moody’s said if the transaction with Shuanghui is completed as currently contemplated then it will reduce Smithfield’s unsecured ratings to B2 from B1, according to a statement today.

The average relative yield on speculative-grade, or junk-rated, debt decreased 1.9 basis points to 547.6 basis points, Bloomberg data show. High-yield, high-risk debt is rated below Baa3 by Moody’s and less than BBB- at Standard & Poor’s.