Credit-Fear Gauge Jumps Above 100 for First Time in Three Years

The cost to protect against defaults by North American investment-grade companies soared to a three-year high as concern lingered over falling commodity prices and financial-market turmoil triggered by China.

The Standard & Poor’s 500 Index was poised for its lowest close since September, halting a global equities rally. The Bloomberg Commodities Index on Tuesday fell to the lowest level since at least 1991 on sluggish demand from developing nations. The benchmark rebounded by 0.3 percent at 3:16 p.m. on Wednesday in New York. While Chinese exports unexpectedly expanded in December in local-currency terms, the world’s second-largest economy is expected to report the slowest annual expansion since 1990 next week.

"The recent noise from the Chinese market and continued pressure on oil has prompted investors to adjust their default expectations upward," said Ryan Jungk, a Hartford, Connecticut-based credit analyst at Newfleet Asset Management LLC. "Investment grades are not immune from the bearish sentiment."

The risk premium on the Markit CDX North America Investment Grade Index, which is tied to 125 equally weighted companies, rose five basis points to 103.3, according to prices compiled by Bloomberg. The measure hasn’t closed above 100 since 2012.

Junk Debt

A similar gauge for junk debt climbed for the first time in three days. The benchmark gained 16 basis points to 532.8, heading for the highest close in three years.

Low commodity prices could cause problems for U.S. oil companies with covenants that specify certain debt-to-earnings ratios or interest coverage, and will make it harder for them to obtain financing to continue operating, said Mark Sadeghian, a senior director for the energy and commodities group at Fitch Ratings Ltd.

"Commodity-related stress may not be fully priced in," UBS AG strategists Matthew Mish and Stephen Caprio wrote in a note on Wednesday. Implied annual default rates for the high-yield energy as well as metals and mining industries could rise as high as 25 percent to 30 percent if commodity prices fall further, they said.

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