Credit-Default Swaps Benchmark in U.S. Decreases for Sixth Day

A gauge of U.S. company credit risk declined for a sixth day after data showed fewer Americans than projected filed applications for unemployment benefits last week, indicating the U.S. labor market is improving.

The Markit CDX North American Investment Grade Index, a credit-default swaps benchmark used to hedge against losses or to speculate on creditworthiness, fell 0.4 basis point since Dec. 24 to 62 basis points as of 3:47 p.m. in New York, according to prices compiled by Bloomberg. Markets were closed yesterday for the Christmas holiday.

The default-swaps benchmark, at the lowest level since November 2007 on an intraday basis, has fallen 8 basis points since Dec. 17 as improvements in gross domestic product, consumer spending and durable goods orders signal a firming economy. Jobless claims declined by 42,000 to 338,000 in the week ended Dec. 21, a Labor Department report showed today in Washington. The median forecast of 42 economists surveyed by Bloomberg called for a drop to 345,000.

Amid growing optimism for credit, the extra yield investors demand to own junk debt rather than government securities has dropped below 400 basis points on the Bank of America Merrill Lynch U.S. High Yield Index for the first time since October 2007. Average relative yields of 396 as of Dec. 24 compare with a fair value of 576, according to FridsonVision LLC.

“It’s hard to argue that high yield bonds currently offer attractive reward for the risk,” Martin Fridson, chief executive officer of the New York-based research firm, wrote two days ago in an e-mailed note.

Default Rates

Junk-bond spreads are tightening with Fitch Ratings forecasting U.S. high-yield default rates will remain between 1.5 percent and 2 percent next year. Credit availability and good corporate fundamentals, or the “key pillars” of low default rates, are remaining steady, Fitch said today in a report.

Seventy-five issuers have defaulted this year worldwide, Standard & Poor’s analysts led by Diane Vazza said today in a report that cited a Dec. 19 ratings cut to Codere SA, the Spanish gaming company that missed a coupon payment on Dec. 15.

The investment-grade Markit CDX index, which typically falls as investor confidence improves and rises as it deteriorates, has averaged 79.4 basis points this year.

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 extra yield investors demand to hold investment-grade corporate bonds rather than government debt tightened 0.1 to 113.6, Bloomberg data show.

The risk premium on the Markit CDX North American High Yield Index, tied to the debt of 100 speculative-grade companies, fell 2 basis points to 305, Bloomberg prices show. The index has declined from 340 on Dec. 17.

High-yield, high-risk bonds are rated below Baa3 by Moody’s Investors Service and lower than BBB- at S&P.

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