Credit Swaps in U.S. Record Largest Weekly Increase Since June

A gauge of U.S. corporate credit risk rose for the third day, recording the biggest weekly increase in almost two months amid concern the Federal Reserve will taper its bond-buying program in September.

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 3.7 basis points to a mid-price of 81.5 basis points at 4:56 p.m. in New York, according to prices compiled by Bloomberg. The measure climbed 6.1 basis points this week, the largest advance since the comparable period ended June 21.

Signs the recovery in the world’s largest economy is strengthening may prompt the central bank to begin paring its $85 billion in monthly bond purchases that have supported credit markets. A drop in jobless claims to an almost six-year low last week has increased the likelihood the Fed will reduce its purchases soon, said Kashif Ishaq, head of investment-grade corporate bond trading at Delaware Investments.

“Recent improved economic data in Europe and the U.S. is fueling discussion on tapering,” Ishaq said in a telephone interview from Philadelphia. “Volatility in the Treasury market and other asset classes is driven by overall global investor expectations that the Fed will reduce their amount of monetary stimulus.”

Jobless Claims

The credit-swaps index typically rises as investor confidence deteriorates and falls 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 number of applications for unemployment insurance payments dropped by 15,000 to 320,000 in the week ended Aug. 10, the least since October 2007, a Labor Department report showed yesterday.

Yields on 10-year Treasuries rose as high as 2.86 percent today, the highest intraday level since July 29, 2011.

“Investors once again appear to be becoming somewhat uncomfortable with the rate of increase in interest rates and some are setting hedges,” Hans Mikkelsen, head of U.S. investment-grade credit strategy at Bank of America Corp. in New York, wrote in a research report yesterday.

Housing Starts

Housing starts climbed 5.9 percent to an 896,000 annualized rate in July from a revised 846,000 pace the month prior that was higher than previously reported, figures from the Commerce Department showed today in Washington. The median estimate of 82 economists surveyed by Bloomberg was for a 900,000 rate.

The Thomson Reuters/University of Michigan preliminary August index of consumer sentiment fell to 80 from 85.1 last month, which was the highest since July 2007.

The Fed will probably reduce its bond-buying program in September, according to 65 percent of the economists in an Aug. 9-13 Bloomberg survey. Last month, half of respondents predicted a September reduction.

The default premium on the Markit CDX North American High Yield Index, a measure of speculative-grade corporate bond risk, rose 7.3 basis points to 405.1 basis points, Bloomberg prices show. The gauge has increased 25.9 basis points this week, poised for the biggest climb since the period ended June 21.

Bond Sales

Sales of corporate bonds in the U.S. declined 43 percent this week, the steepest drop in more than a month, as yields rose.

Viacom Inc., owner of the Paramount film studios, raised $3 billion in its biggest offering in about seven years and Fort Worth, Texas-based Burlington Northern Santa Fe LLC sold $1.5 billion of debt, according to data compiled by Bloomberg. Total sales of $19 billion were the least since $1.3 billion in the five days ended July 5.

The average extra yield investors demand to hold investment-grade corporate bonds rather than similar-maturity Treasuries narrowed 0.3 basis point to 130 basis points, Bloomberg data show. The measure for speculative-grade, or junk-rated, debt tightened 2.5 basis points to 564.3 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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