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Default Swaps Fall to Six-Week Low on Greece: Credit Markets


March 8 (Bloomberg) — The cost to protect against corporate defaults fell to the lowest in more than six weeks and U.S. investment-grade bond sales rose fivefold as optimism builds that Greece’s budget crisis will be contained.

The Markit CDX North America Investment-Grade Index, linked to credit swaps on 125 companies, dropped 6 basis points last week to 85.4 basis points, the lowest since Jan. 20, CMA DataVision prices show. Asia-Pacific indexes of credit-default swaps declined today. Goldman Sachs Group Inc. led $34.5 billion of investment-grade offerings in the last two weeks, compared with $6.8 billion in the previous period, according to data compiled by Bloomberg.

Investors are growing less skittish after Greece sold 5 billion euros ($6.8 billion) of notes last week and passed 4.8 billion euros of spending cuts, reducing the chances of a default. While the nation’s budget gap rattled world markets and caused the euro to weaken 4.5 percent against the dollar this year, German Chancellor Angela Merkel called the latest measures a “courageous step” and French President Nicolas Sarkozy said the euro region is ready to rescue the country.

“The EU and Germany have stepped in and said, ‘We’re going to support Greece,’” said Joel Levington, director of corporate credit for Brookfield Investment Management Inc. in New York, with $24 billion in assets under management. “It seems like that’s being managed prudently.”

‘Bid for Risk’

The extra yield investors demand to own company bonds rather than government debt fell 2 basis points on March 5 to 163 basis points, or 1.63 percentage point, the lowest since Jan. 21, according to Bank of America Merrill Lynch’s Global Broad Market Corporate index. Spreads narrowed 5 basis points for the week, the biggest drop since the period ended Jan. 8. Average yields are 4.06 percent, the data show.

“The removal of Greece as an immediate concern has been enough to support the bid for risk,” JPMorgan Chase & Co. analysts led by Peter Acciavatti in New York wrote in a March 5 report.

Elsewhere in credit markets, mutual funds that invest in high-yield, high-risk bonds had $479 million of inflows, the second week of increases, research firm EPFR Global reported. Investors plowed a record $2.6 billion into global bond funds in the week ended March 3, moving out of money markets to seek higher returns, the Cambridge, Massachusetts-based data company said in a report.

Trading Surge

Corporate bond trading in the U.S. surged to a two-month high. An average $21.6 billion of debt securities traded daily on Trace last week, the most since the period ending Jan. 8, according to the Financial Industry Regulatory Authority. The average was $18.5 billion a day during the previous week. Trace is Finra’s bond-price reporting system.

American International Group Inc.’s aircraft-leasing unit is seeking to add a $550 million term loan to bank financing, boosting its first debt sale through capital markets since AIG’s 2008 U.S. bailout to $1.3 billion, according to a person familiar with the negotiations. Bank of America Corp. and Goldman Sachs Group Inc. are arranging the financing for International Lease Finance Corp.

A group of Tribune Co. creditors sued the banks behind the publisher’s 2007 leveraged buyout, claiming the $8 billion in loans they arranged doomed the media company to bankruptcy. The banks knew the buyout “would render Tribune insolvent,” attorneys for bondholders owed $1.2 billion wrote in their complaint. Spokesmen for JPMorgan and Citigroup Inc. declined to comment, while representatives of Bank of America Merrill Lynch and Morgan Stanley didn’t return telephone calls.

The S&P/LSTA US Leveraged Loan 100 Index climbed 0.7 cent to 89.66 cents on the dollar last week, the highest since Feb. 3. The debt has risen from a record low of 59.2 cents on the dollar on Dec. 17, 2008.

Fannie Mae

The gap between yields on the five-year debt of Fannie Mae, the mortgage-finance company under government control, and similar-maturity Treasuries widened for a sixth day, climbing less than 0.01 percentage point on March 5 to about 0.18 percentage point, Bloomberg data show.

Financial Services Committee Chairman Barney Frank said Fannie Mae and Freddie Mac bondholders shouldn’t assume the U.S. will make them whole on their investments as Congress addresses the companies’ future. The Massachusetts Democrat later clarified his comments, saying he wouldn’t interfere with a Treasury Department agreement that runs through 2012 to inject capital into the companies as needed.

The number of companies globally that were rated B- or lower rose to 523, or 9.3 percent of the total, at the end of last year as speculative-grade issuers were downgraded, Standard & Poor’s analysts led by Diane Vazza said in a March 5 report. That compares with 8.4 percent in 2008 and 5.8 percent in 2007, S&P said.

High-Yield Spreads

Spreads on speculative-grade debt narrowed 29 basis points last week to 637 basis points, the tightest since Jan. 22, according to the Bank of America Merrill Lynch U.S. High Yield Master II index. High-yield, high-risk companies are rated lower than Baa3 by Moody’s Investors Service and below BBB- by S&P.

Alfa Bank, Russia’s biggest private lender, plans to sell five-year dollar bonds this week, yielding between 8.25 percent and 8.5 percent, according to a person familiar with the matter. The bank hired JPMorgan Chase & Co. and UBS AG to manage the transaction.

Signs that the U.S. recovery is on track have helped investors look past Greece’s budget struggles. U.S. employers in February cut fewer jobs than economists had forecast, even as East Coast snowstorms forced some to temporarily close, a government report showed. Of the 469 companies in the Standard & Poor’s 500 index that reported earnings since Jan. 11, three- quarters beat analysts’ expectations, Bloomberg data show.

‘Initial Signs’

Companies have started exceeding estimates on revenue, not just profits, “indicating that actual revenue growth as opposed to mere cost-cutting is now helping drive profitability,” Morgan Stanley strategists Rizwan Hussain and Adam Richmond wrote in a March 5 note to clients.

Cash-to-debt ratios are at record highs for investment- grade companies, the Morgan Stanley strategists said. The smallest percentage of non-financial companies in three years, 39 percent, increased leverage in the fourth quarter, they said.

The improving economic and earnings trends may help credit spreads narrow this week, Barclays Capital credit trader Jason Quinn and Citigroup strategist Mikhail Foux said March 5. Foux, in a note to clients, said investors should be cautious as “we do not feel that the sovereign story has fully played out.”

Credit-Default Swaps

Investors aren’t likely to enter the market as quickly as they exited, Quinn, the co-head of high-grade and high-yield flow trading at Barclays Capital in New York, said in an interview.

“That’s going to happen slowly,” he said. “When investors pull back from the market, it’s often in response to something they weren’t expecting and tends to happen quickly. Coming back in usually takes a bit of time, but we’re definitely seeing the initial signs.”

Concern that Greece’s budget woes would spread to other countries had pushed credit-default swap indexes, which measure corporate credit risk, to at least three-month highs. They’ve retraced more than half of that increase. The Markit CDX index has fallen almost 21 basis points since Feb. 8. In London, the Markit iTraxx Europe index of swaps on 125 companies with investment-grade ratings, fell 7 basis points last week to 78, a decline of 16 basis points since Feb. 8, according to JPMorgan Chase & Co. prices.

Goldman Sachs Offering

In Asia, the Markit iTraxx Japan index dropped 6 basis points to 122 basis points as of 9:30 a.m. in Tokyo, according to Morgan Stanley prices. The Markit iTraxx Asia index of 50 investment-grade borrowers outside Japan decreased 4 basis points to 98 basis points as of 8:18 a.m. in Singapore, Royal Bank of Scotland Group Plc prices show. The Markit iTraxx Australia index fell 4 basis points to 84.5 basis points as of 11:16 a.m. in Sydney, according to Citigroup Inc.

Default swaps pay the buyer face value if a borrower defaults in exchange for the underlying securities or the cash equivalent. A basis point is 0.01 percentage point and equals $1,000 a year on a contract protecting against default on $10 million of debt for five years.

Companies globally issued $42.1 billion of bonds last week, compared with $50.2 billion in the previous period, according to data compiled by Bloomberg. Sales total $490.6 billion for the year, down 34 percent from the $745 billion raised through March 5, 2009. Issuance in Europe dropped 36 percent to 8.9 billion euros ($12.1 billion), the second-slowest week this year, the data show.

Goldman Sachs, the most profitable securities firm in Wall Street history, sold $2 billion of dollar-denominated debt due 2020 on March 1 as U.S. banks seek to replace $309 billion of government-guaranteed debt with longer-dated maturities. The New York-based bank last sold 10-year, dollar-denominated notes in May