Credit Market's Fear Gauge Jumps to 3-Year High on China, Oil

The cost to protect against defaults by North American investment-grade companies rose to the highest level in three years amid a new year’s equities rout triggered by the latest cracks in China’s financial market.

The end cost for high-yield debt approached a three-year high as concern grew that the selloff in Chinese capital markets will weigh on a global economy already reeling from an extended commodities slump.

“The year has gotten off to a terrible start," said Martin Fridson, chief investment officer at Lehmann Livian Fridson Advisors LLC in New York. "The high-yield market, like equities, is being affected by the oil prices and the slowdown in China. The connection with China is more indirect, but clearly it’s affecting the overall market."

The risk premium on the Markit CDX North America Investment Grade Index, which is composed of 125 equally weighted credit-default swaps on investment grade entities, soared 10.4 basis points this week to 98.65 basis points in New York. That’s the highest level since December 2012.

A similar benchmark for junk debt jumped 52.36 basis points this week to 522.27 basis points, compared with 522.76 basis points on Dec. 11 that was the most since December 2012.

"People are concerned about headline risk," said Ken Monaghan, the head of global high yield at Amundi Smith Bredeen. "They’re wondering about the extent to which the moves in the market will influence fundamentals, just because it can really change people’s willingness to take risk."