U.S. Corporate Credit Swaps Increase to Highest Level in a Month

A gauge of U.S. corporate credit risk climbed to a one-month high as a decline in jobless claims added to concern the Federal Reserve will begin to reduce its asset purchases next month.

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, increased 4.5 basis points to a mid-price of 80 basis points at 5:01 p.m. in New York, according to prices compiled by Bloomberg. That’s the highest closing level since July 10.

Evidence that the economic recovery is strengthening may prompt the central bank to begin paring its $85 billion in monthly bond purchases that have bolstered credit markets. Claims for jobless benefits declined by 15,000 to 320,000 in the week ended Aug. 10, the fewest since October 2007, from a revised 335,000, a Labor Department report showed today in Washington.

“Investors are assessing the possibility of tapering coming at the end of the year, perhaps in September,” Dorian Garay, a New York-based money manager at ING Investment Management, said in a telephone interview. Alongside the better jobless claims data, he said, “that is definitely affecting the appetite for fixed-income instruments sensitive to a rising interest-rate environment.”

Consumer Prices

Credit-swaps indexes typically rise as investor confidence deteriorates and fall 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.

The consumer-price index increased 0.2 percent in July after a 0.5 percent gain the prior month, according to a separate Labor Department report. The advance matched the median forecast of 82 economists surveyed by Bloomberg. The core measure, which excludes food and fuel, also climbed 0.2 percent from June.

Overall consumer prices increased 2 percent in the 12 months ended in July after a 1.8 percent year-over-year gain in the comparable period ending in June.

The Fed will probably reduce its asset purchases in September, according to 65 percent of economists surveyed Aug. 9-13 by Bloomberg.

Kohl’s Swaps

The default premium on the Markit CDX North American High Yield Index, a measure of speculative-grade corporate bond risk, rose 17.7 basis points to 397.9 basis points, Bloomberg prices show.

The cost to protect the debt of Kohl’s Corp. from default fell by the most in three months after the third-largest U.S. retailer forecast sales for the third quarter above some analysts’ estimates.

Five-year credit swaps tied to Kohl’s dropped 12.4 basis points to 142.6 basis points as of 5:03 p.m., Bloomberg prices show. That’s the biggest decline since May 16.

Kohl’s expects sales in the quarter ending Nov. 2 to increase by 1 percent to 3 percent from the same period in 2012, the Menomonee Falls, Wisconsin-based company said today in a statement. The average of 18 analysts’ estimates compiled by Bloomberg had been 1.4 percent.

The average extra yield investors demand to hold investment-grade corporate bonds rather than similar-maturity Treasuries widened 0.9 basis point to 130.3 basis points, Bloomberg data show. The measure for speculative-grade, or junk-rated, debt rose 1.5 basis points to 566.2 basis points.

High-yield, high-risk debt is rated below Baa3 by Moody’s Investors Service and less than BBB- at Standard & Poor’s.

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