Bond Issue Leads to CDS Decline

Credit default swaps in U.S. fall as Verizon issues record $49 billion in bonds.

A gauge of U.S. company credit risk declined as Verizon Communications Inc. completed a record corporate-bond offering.

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, fell 1.8 basis points to a mid-price of 76.2 basis points as of 4:17 p.m. in New York, according to prices compiled by Bloomberg. The measure typically falls as investor confidence improves and climbs as it deteriorates.

Investors watched the second-largest U.S. phone carrier’s $49 billion, eight-part bond sale today to see how the market would react to the issuance, according to Marc Pinto, head of corporate bond strategy at Susquehanna International Group LLP in New York. After Verizon’s offering, which was more than double Apple Inc.’s $17 billion transaction in April, the company’s swaps declined to the lowest level in a week.

“Everybody is focusing on Verizon,” Pinto said in a telephone interview before the deal priced. “It’s the most important thing that’s happening today, and everything feeds out of that one sale.”

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.


Verizon Offering

Proceeds from the offering will help the New York-based company purchase Vodafone Group Plc’s 45 percent stake in Verizon Wireless for $130 billion.

Five-year credit swaps tied to Verizon debt fell 14 basis points to 87.5 basis points as of 3:47 p.m. in New York, according to data provider CMA, which is owned by McGraw-Hill Financial Inc. and compiles prices quoted by dealers in the privately negotiated market.

Earlier this week, swaps for the company climbed to as high as 111.7, the highest intraday level since May 2010.

Defaults on global junk bonds fell last month, according to a report dated yesterday by Moody’s Investors Service.

The trailing 12-month global speculative-grade default rate was 2.9 percent in August, down from 3 percent in July, according to the rating company.

The U.S. speculative-grade default rate dropped to 2.8 percent last month from 2.9 percent in July. Moody’s forecasts the global rate to climb to 3.1 percent at the end of this year.

The risk premium on the Markit CDX North American High Yield Index, a credit-swaps benchmark tied to speculative-grade bonds, fell 7.5 basis points to 368.3, Bloomberg prices show.

The average extra yield investors demand to hold dollar-denominated, investment-grade corporate bonds rather than similar-maturity Treasuries widened 1 basis point to 133.5 basis points, Bloomberg data show. The measure for speculative-grade, or junk-rated, debt widened 4.7 basis points to 600.2.

Investment-grade debt is rated Baa3 or higher at Moody’s and at least BBB- by Standard & Poor’s.

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