December 10, 2013 — A gauge of U.S. corporate credit risk climbed from a six-year low as concern that lawmakers may fail to reach a budget deal overshadowed better-than-forecast economic data. Deere & Co. plans to sell $1.25 billion of bonds.
The Markit CDX North American Investment Grade Index, a credit-default swaps benchmark used to hedge against losses or to speculate on creditworthiness, added 0.5 basis point to a mid-price of 67.8 basis points as of 2:13 p.m. in New York, according to prices compiled by Bloomberg. The measure ended yesterday at 67.3, the lowest level since November 2007.
Investors pushed the measure higher amid budget negotiations and as concern mounts that interest rates will rise when the central bank begins to reduce $85 billion of monthly purchases of mortgage bonds and Treasuries that have boosted credit markets. The swaps benchmark typically increases as investor confidence deteriorates and falls as it improves.
Next year will be “challenging” for bonds, Bank of America Corp. strategists said today in their global outlook press statement.
“Tightening spreads and rising rates could make total returns challenging for fixed-income investors,” the Charlotte, North Carolina-based bank said in the release, forecasting returns for junk debt of about half this year’s.
Dollar-denominated high-yield, high-risk bonds rated below Baa3 by Moody’s Investors Service and lower than BBB- at Standard & Poor’s, have handed investors a 7 percent return this year, according to Bank of America Merrill Lynch index data.
Credit swaps 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.
Deere Offering
The index rose after falling as much as 0.5 basis point earlier as job openings in the U.S. climbed to a five-year high in October.
John Deere Capital, the financing arm of the largest maker of agricultural equipment, may offer $500 million of two-year, floating-rate notes to yield 12 basis points more than the three-month London interbank offered rate and $750 million of five-year, fixed-rate debt to yield 55 basis points more than similar-maturity Treasuries, according to a person with knowledge of the transaction. The sale may be completed as soon as today.
The securities are expected to be rated A2 by Moody’s with proceeds going toward general corporate purposes, said the person, who asked not to be identified because terms aren’t set.
The risk premium on the Markit CDX North American High Yield Index, a credit-swaps benchmark tied to speculative-grade bonds, rose 2.1 basis points to 335.5, Bloomberg prices show.
The average extra yield investors demand to hold dollar-denominated, investment-grade corporate bonds rather than similar-maturity Treasuries narrowed 1.8 basis points to 123.8 basis points, Bloomberg data show. The measure for speculative-grade, or junk-rated, debt rose 0.6 basis point to 546.8.
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