Credit Swaps Index in U.S. Falls, Capping Best Year Since 2009

A gauge of U.S. company credit risk fell, ending its best year since 2009 as the the Federal Reserve decided to begin curbing its unprecedented stimulus measures on strengthening economic conditions.

The Markit CDX North American Investment Grade Index, a credit-default swaps benchmark used to hedge against losses or to speculate on creditworthiness, narrowed 1.4 basis points to a mid-price of 62.3 basis points, according to prices compiled by Bloomberg.

The measure dropped 32 basis points this year, the most since 2009, and reached the lowest level since October 2007 on Dec. 26 as an improving growth outlook bolstered investor perception of a positive economic environment for corporations. The index, which typically falls as investor confidence improves and rises as it deteriorates, is below its 2013 average of 79.3, Bloomberg prices show.

U.S. gross domestic product is forecast to expand 2.6 percent next year, following 1.7 percent this year, according to economists surveyed by Bloomberg. A swelling economy spurred Fed policy makers to decide this month to begin cutting their monthly $85 billion in bond purchases that have boosted credit markets.

The extra yield investors demand to hold investment-grade corporate bonds rather than government debt narrowed 1.5 basis points to 112.4, Bloomberg data show. The spread for high-yield, high-risk securities, rated below Baa3 by Moody’s Investors Service and lower than BBB- at Standard & Poor’s, declined 3.6 basis points to 536.5.

Outperforming Cash

The risk premium on the Markit CDX North American High Yield Index, tied to the debt of 100 speculative-grade companies, declined 5.2 basis points to 307.2, Bloomberg prices show. The index, which reached the lowest since 2007 on Dec. 26, is down from 340 on Dec. 17. A basis point equals $1,000 annually on a contract protecting $10 million of debt.

The investment-grade swaps index outperformed its cash counterpart in 2013 for the first time in five years, according to Barclays Plc. The contracts pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt.

Today there are fewer sellers of protection in the market, “but it is benefiting from the extraordinary level of monetary policy accommodation, which is helping to contain volatility and keeping macro concerns at bay,” Barclays strategists led by Jeffrey Meli wrote in their 2014 global credit outlook published this month.

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