Credit Swaps in U.S. Climb as Fed Minutes Support Stimulus Cuts

The cost to protect against losses on corporate bonds rose as minutes of the Federal Reserve’s last meeting showed policy makers were “broadly comfortable” with Chairman Ben S. Bernanke’s plan to start reducing bond buying later this year if the economy improves.

The Markit CDX North American Investment Grade Index of credit-default swaps, which investors use to hedge against losses or to speculate on creditworthiness, increased 2.2 basis points to a mid-price of 84.4 basis points as of 6:02 p.m. in New York, according to prices compiled by Bloomberg.

Signs the U.S. economy is firming have been contributing to speculation the Fed will scale back its bond purchases that have supported credit markets. The Federal Open Market Committee minutes from July’s gathering showed policy makers on course to trim the central bank’s asset-buying program, known as quantitative easing, later this year.

“The Fed appeared comfortable with its forecasts and the ability of rising stock market prices to overcome the de facto tightening that followed its early summer QE3 announcements,” Jim Vogel, the head of agency-debt research at FTN Financial in Memphis, Tennessee, said in an e-mail.

The index, which typically rises as investor confidence deteriorates and falls as it improves, increased 6.1 basis points last week, the largest advance since the period ended June 21.

‘Almost All’

“Almost all committee members agreed that a change in the purchase program was not yet appropriate,” and a few said “it might soon be time to slow somewhat the pace of purchases as outlined in that plan,” according to the record of the FOMC’s July 30-31 gathering released today in Washington.

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.

Swaps tied to Staples Inc. increased by the most since September as the world’s largest office-supplies chain cut its annual profit forecast because of declines in its retail and international business. The contracts added 22 basis points to a mid-price of 176 basis points, CMA data show.

The risk premium on the Markit CDX North American High Yield Index, a credit-swaps benchmark tied to speculative-grade bonds, added 9.5 basis points to 414, Bloomberg prices show.

‘Imminent Tapering’

Southern Co. sold $500 million of 2.45 percent, five-year senior notes in an offering increased from $400 million that priced to yield 93 basis points more than similar-maturity Treasuries, Bloomberg data show. Proceeds will be used for paying existing debt and general corporate purposes.

The average extra yield investors demand to hold dollar-denominated, investment-grade corporate bonds rather than similar-maturity Treasuries narrowed 0.8 basis point to 130.6 basis points, Bloomberg data show. The measure for speculative-grade, or junk-rated, debt decreased 4.8 to 570.2.

The U.S. distress ratio fell to 6 percent through Aug. 13, with the number of distressed issuers climbing to 74 from 73 as of July 15, according to a report today by Standard & Poor’s Global Fixed Income Research. The number of issues trading with a spread over Treasuries of 1,000 basis points or more increased to 103 from 101 a month earlier.

“The imminent tapering of stimulus by the Federal Reserve led to a rise in corporate spreads earlier this year, which took the distress ratio higher,” S&P said.

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