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U.S. Credit Swaps Record Biggest Four-Day Rise Since March

May 13, 2013

May 13 (Bloomberg) -- A gauge of U.S. corporate credit risk rose, adding to its biggest four-day climb in almost two months.

The Markit CDX North American Investment Grade Index, a credit-default swaps benchmark that investors use to hedge against losses or to speculate on creditworthiness, increased 1.2 basis points to a mid-price of 73.4 basis points at 12:55 p.m. in New York, according to prices compiled by Bloomberg. The gauge has added 4.5 basis points in the past four days, its biggest such advance since the period ended March 25.

Retail sales rose 0.1 percent in the U.S. in April, following a 0.5 percent drop in March, Commerce Department figures showed today in Washington. The median forecast of 81 analysts surveyed by Bloomberg called for a 0.3 percent decline. Investors may be concerned that an improving economy will lead the Federal Reserve to begin tapering its stimulus efforts or raising interest rates.

"Duration risk is at all-time highs," Scott Colyer, who manages $10.5 billion as chief investment officer at Advisors Asset Management in Monument, Colorado, said in a telephone interview. "It doesn’t take much of a move in interest rates to really destroy the total return of a bond portfolio. That’s the risk that bothers us."

The credit-swaps index 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.


Fed Strategy


The Fed has pledged to hold down its benchmark interest rate, set between zero and 0.25 percent since December 2008, as long as unemployment remains above 6.5 percent and the outlook for inflation is less than 2.5 percent.

Earlier this month the Fed said it will maintain $85 billion a month of asset purchases.

"Fed officials have mapped out a strategy for winding down its bond-buying program and manage highly unpredictable market expectations," RBS Securities Inc. analysts led by Edward Marrinan wrote in a note today. "The timing on when to start is still being debated."


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