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U.S. Corporate Credit Risk Index Rises on Inventory Increase

Bloomberg, 8/10/2010

A benchmark gauge of U.S. corporate credit risk rose to the highest in more than two weeks as wholesaler inventories increased less than forecast and amid speculation the Federal Reserve may announce further stimulus.

The Markit CDX North America Investment Grade Index Series 14, which investors use to hedge against losses on corporate debt or to speculate on creditworthiness, climbed 3.28 basis points to a mid-price of 105.3 basis points as of 12:51 p.m. in New York, according to Markit Group Ltd. The index, which typically rises as investor confidence deteriorates, reached its highest since July 23.

Weakening economic data "are signaling a slowdown is underway" in the U.S. economy, said Nicholas Finkelman, who helps oversee $3.5 billion of bonds as a money manager at New York-based Ryan Labs Inc. The 0.1 percent June increase in the value of inventories followed a 0.5 percent gain the prior month, the Commerce Department said today in Washington. Swaps on Anadarko Petroleum Corp. widened.

"General concerns across economic numbers are paving the way for weakness," Finkelman said. "Investors are going to be paying very close attention to the language" of the Federal Open Market Committee's statement.

Some investors have speculated that the Fed is moving toward another round of debt purchases, known as quantitative easing, after reports cast doubt on the economy's ability to recover. The central bank bought $300 billion of Treasuries from March to October 2009 to bring down borrowing costs.

Fastest Start

Companies are taking advantage of borrowing costs near the lowest in six years to issue $51 billion of debt this month, the fastest start to an August on record, according to data compiled by Bloomberg. Anadarko led 12 companies selling $11.7 billion of debt yesterday.

"You've got a little indigestion from the new deals, there's just been a ton of them over the last few days," Rich Lee, managing director of fixed-income at New York based broker- dealer Wall Street Access, said today in an interview. "People are sitting and waiting, making sure the Fed doesn't throw any surprises into the equation."

Credit swaps linked to Anadarko rose 27.3 basis points to 314.2, CMA prices show. The company sold $2 billion of 6.375 percent notes due in 2017 that priced yesterday at par to yield 415 basis points more than similar-maturity Treasuries, according to data compiled by Bloomberg.

The debt fell 0.5 cent to 99.5 cents on the dollar, a spread of 424.3 basis points, as of 12:23 p.m. in New York, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.

Anadarko Stake

The Woodlands, Texas-based Anadarko holds a 25 percent stake in BP Plc's Macondo well, which blew out and led to the worst spill in U.S. history. BP has sealed off the source of the oil leak.

"Everything tightened up so much based on pricing yesterday," Lee said. "They priced it a lot tighter than I thought they were going to. I think this is just an adjustment of that."

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.

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