Credit-Default Swaps in U.S. Increase as Fed Reduces Bond BuyingJessica Summers
A measure of U.S. corporate credit risk rose after the Federal Reserve said it would trim its monthly bond purchases by $10 billion to $65 billion, continuing its plan for a gradual withdrawal of stimulus.
The Markit CDX North American Investment Grade Index, a credit-default swaps benchmark used to hedge against losses or to speculate on creditworthiness, rose 3.6 basis points to 72.6 basis points at 3:51 p.m. in New York, according to prices compiled by Bloomberg. The gauge reached a more-than two-month high Jan. 24.
Policy makers at the Fed pressed on with a reduction of its purchases of Treasury and mortgage debt, which boosted credit markets after the worst recession since the Great Depression. The Federal Open Market Committee left unchanged its statement that it will probably hold its target interest rate at almost zero “well past the time” that unemployment falls below 6.5 percent.
“We are at the very beginning of an unprecedented ‘Great Unwind,’” Marc Pinto, the head of corporate-bond strategy at brokerage Susquehanna International Group LLP, said in an e-mail. “Investors are rightfully uneasy as there is no historical context for it.”
The swaps gauge 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.
“Labor market indicators were mixed but on balance showed further improvement,” the FOMC said today in a statement following a two-day meeting in Washington that was the last for Chairman Ben S. Bernanke, who will be succeeded by Vice Chairman Janet Yellen on Feb. 1. “The unemployment rate declined but remains elevated.”
The Fed this month began paring the purchases by $10 billion a month to $75 billion.
Emerging-market currencies from Brazil to Hungary declined, underscoring the exodus from assets of developing nations as the Fed tightens the monetary spigot.
“There’s a tremendous amount of uncertainty and some of it’s actually coming to fruition with some of these currencies getting hammered,” Robert Grimm, head of corporate trading at Odeon Capital Group LLC in New York, said in a telephone interview. “Raising rates isn’t the answer.”
Ardagh Group SA sold $830 million of bonds in two parts through one of its units. The glass packaging maker issued equal portions of $415 million of 6.25 percent, five-year notes to yield 473 basis points more than similar-maturity Treasuries and 6.75 percent, seven-year debt to yield 459 basis points more than benchmarks, Bloomberg data show.
The notes may be rated Caa1 by Moody’s Investors Service and proceeds will be used to finance the Luxembourg-based company’s acquisition of Verallia North America, the data show.
The risk premium on the Markit CDX North American High Yield Index, tied to the debt of 100 speculative-grade companies, widened 21 basis points to 353.2, Bloomberg prices show. High-yield, high-risk bonds are rated below Baa3 by Moody’s and less than BBB- at Standard & Poor’s. A basis point is 0.01 percentage point.
The extra yield investors demand to hold investment-grade corporate bonds rather than government debt rose 2.7 basis points to 113.2, Bloomberg data show.