Credit Swaps in U.S. Rise; Citigroup Leads Surge in Bond SalesCallie Bost
A gauge of U.S. company credit risk rose from a four-month low after the Federal Reserve decided to refrain from cutting stimulus, stoking a $14.9 billion surge of bond offerings led by Citigroup Inc.’s $1.75 billion sale.
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 0.4 basis point to a mid-price of 69.9 basis points as of 5:14 p.m. in New York, according to prices compiled by Bloomberg. The measure typically rises as investor confidence deteriorates and falls as it improves.
The index dropped 3.6 basis points yesterday to 69.5, the lowest level since May 8, after the Fed announced it will maintain its $85 billion pace of monthly bond purchases that have bolstered company debt. Investors are now looking for further direction on how credit markets will react to the Fed’s continued pace of bond buying, according to Marc Gross, a money manager who oversees $3.5 billion in fixed-income funds at RS Investments in New York.
“Swaps made such a tremendously large move yesterday, so traders are trying to figure out what to do next,” Gross said in a telephone interview. “The economy is in a pause.”
Benchmark 10-year Treasury yields declined 16 basis points, or 0.16 percentage point, to 2.69 percent yesterday after the Fed announcement, before rising to 2.75 percent today, according to Bloomberg Bond Trader data. Investment-grade bonds gained 0.7 percent, the biggest single-day return in more than a year, according to Bank of America Merrill Lynch index data.
“Ben, bless his soul, is determined to keep that 30-year bond rally going,” Robert Michele, chief investment officer for fixed income, currencies and commodities at JPMorgan Asset Management, said in a Bloomberg Television interview with Stephanie Ruhle and Erik Schatzker. “But it’s going to come to an end at some point. The vast liquidity in the system will be ignited.”
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.
The debt sold or planned for today brings offerings for the week to $32.2 billion, Bloomberg data show.
Citigroup issued five-year, senior unsecured notes with a 2.5 percent coupon that yielded 112 basis points more than similar-maturity Treasuries, according to data compiled by Bloomberg.
Sirius XM Radio Inc. sold $650 million of seven-year 5.875 percent, senior unsecured notes, Bloomberg data show.
The New York-based radio broadcasting company will use proceeds to help redeem outstanding 7.625 percent senior notes due in 2018, according to a company statement distributed by PR Newswire.
A new version of the Markit CDX investment-grade index will begin trading tomorrow, according to a statement on the Markit Group Ltd. website. Assured Guaranty Municipal Corp., Weatherford International Ltd., Avon Products Inc. and Genworth Holdings Inc. will be added to Series 21 of the index and SLM Corp., H.J. Heinz Co., Dell Inc. and Genworth Financial Inc. will be removed.
New versions of Markit’s indexes are created every six months. Companies are replaced if they no longer hold appropriate grades, aren’t among the most actively traded borrowers or fail to meet other criteria.
The risk premium on the Markit CDX North American High Yield Index, a credit-swaps benchmark tied to speculative-grade bonds, increased 5.6 basis points to 346.1, Bloomberg prices show.
The average extra yield investors demand to hold dollar-denominated, investment-grade corporate bonds rather than similar-maturity Treasuries tightened 5 basis points to 129.8 basis points, Bloomberg data show. The measure for speculative-grade, or junk-rated, debt fell 11.2 basis points to 652.
Investment-grade debt is rated Baa3 or higher at Moody’s Investors Service and at least BBB- by Standard & Poor’s.