Bernanke’s Stimulus Sends Debt-Market Stress Back to 2010 Levels
The U.S. two-year interest-rate swap spread, a measure of debt-market stress, fell 1.12 basis points to 12.63 basis points, the lowest since March 2010, according to data compiled by Bloomberg. A gauge of U.S. corporate credit risk dropped for the fourth day to the least since March 2011, the data show.
Debt buyers are fueling a rally, signaling that U.S. and European government plans to repurchase bonds have alleviated concerns that a slowing global economy will eat into corporate profits. The Fed’s pledge yesterday to expand holdings of long- term securities has intensified investors’ search for alternatives to government debt paying record low yields, even with corporate debentures also offering the lowest rates ever.
“Investors need yield,” said Sharon Stark, chief market strategist at Sterne Agee & Leach Inc. in Birmingham, Alabama, said in a telephone interview. “They’re going to continue to pour into the highest-yielding asset class.”
The Markit CDX North America Investment Grade Index, a credit-default swaps benchmark that investors use to hedge against losses on corporate debt or to speculate on creditworthiness, fell 2.7 basis points to a mid-price of 83 basis points, according to prices compiled by Bloomberg.
The credit swaps index, which typically falls as investor confidence improves and rises as it deteriorates, has declined about 19 basis points this month. 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 interest-rate swap gauge narrows when investors favor assets such as company debentures and widens when they seek the perceived safety of government securities.
The Federal Reserve’s third round of quantitative easing to stimulate the U.S. economy is leading junk-bond buyers to accept the lowest yields ever as they seek a reprieve from a fourth year of near-zero interest rates.
Yields on speculative-grade bonds in the U.S. fell to a record 7.07 percent yesterday, according to Bank of America Merrill Lynch index data. Distressed bonds, that yield at least 10 percentage points more than comparably dated Treasuries, have returned 3.34 percent this month, 1.8 percentage points more than junk notes on average, the data show.
High-risk, high-yield bonds are rated below BBB- by Standard & Poor’s and below Baa3 by Moody’s Investors Service.
“The risk markets are rallying even though there’s a round of some pretty negative economic data,” Guy LeBas, chief fixed- income strategist at Janney Montgomery Scott LLC in Philadelphia, said in a telephone interview. “I think the primary move here is that the Fed is increasing the market’s expectation for inflation.”
A report from the Labor Department today showed average hourly earnings adjusted for inflation decreased 0.7 percent in August from the previous month, the biggest drop since June 2009. Real wages were unchanged from August 2011.
Consumer prices climbed 0.6 percent in August, the most since June 2009, as Americans paid more at filling stations, the Labor Department also said.
“We still have risk in the recovery of demand,” said Dorian Garay, a money manager for a global investment-grade debt fund at ING Investment Management, which oversaw 322 billion euros ($423 billion) as of year-end. “My main concern is that inflation is picking up at a faster pace than consumer spending is.”
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