• Wednesday, February 28, 2024
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Credit swaps hold in U.S. as bond spreads reach lowest since ’07


A gauge of U.S. corporate credit risk held at about the lowest level in six years as relative yields on investment-grade debt fell to the least since 2007.

The Markit CDX North American Investment Grade Index, a credit-default swaps benchmark used to hedge against losses or to speculate on creditworthiness, decreased by 0.4 basis point to 62.9 basis points as of 10:44 a.m. in New York on Friday. The measure closed at 62 basis points on Dec. 26, the lowest since October 2007.

The index narrowed 32 basis points last year, the most since 2009, as an improving economic outlook spurred the Federal Reserve to start scaling back its $85 billion in monthly bond purchases, bolstering investor confidence in corporations’ ability to repay obligations.

The credit-swaps benchmark, which typically falls as investor confidence improves and rises as it deteriorates, averaged 79.2 basis points last year.

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 extra yield investors demand to own high-grade bonds from the most creditworthy borrowers in the U.S. rather than government debentures fell to 127 basis points yesterday, the lowest since July 2007, according to the Bank of America Merrill Lynch U.S. Corporate Index. Spreads have declined from last year’s high of 172 basis points in June.

The risk premium on the Markit CDX North American High Yield Index, tied to the debt of 100 speculative-grade companies, increased 0.3 basis point to 312.6, Bloomberg prices show.

High-yield, high-risk bonds are rated below Baa3 by Moody’s Investors Service and less than BBB- at Standard & Poor’s.  A basis point is 0.01 percentage point.