Improved corporate results reduce credit risk fears

New York: A key gauge of US corporate credit risk fell as companies' fourth-quarter revenue increased, helping offset investor concern stemming from a decline in sales of previously owned US homes.

The Markit CDX North America Investment Grade Index, a benchmark of credit-default swaps that investors use to hedge against losses on corporate debt, declined 2.3 basis points to 91.5 basis points, according to CMA DataVision. The index pared its rise last week from a high of 94.2 basis points on February 23. It typically drops as investor confidence in debt markets improves and rises as it deteriorates.

The gauge declined as higher corporate revenue bolstered investor confidence that companies may more easily meet debt payments, even as homes sales signalled that a lack of job growth might limit government efforts to aid housing. Of the 454 companies in the Standard & Poor's 500 Index that posted fourth- quarter results, 67 per cent beat analyst forecasts, according to data compiled by Bloomberg.

"It's been a pretty decent earnings season and it's the first time we've seen top-line growth, which I think is absolutely key," said Guy Lebas, chief fixed-income strategist and economist at Janney Montgomery Scott in Philadelphia. "It's top-line sales growth that's most important there."

The Markit index rose 0.4 basis points last week, CMA prices show.

Credit swaps

Credit swaps on Bank of America fell 0.5 basis points to 143.5 basis points, contracts linked to Citigroup slid 2 basis points to 208.5 basis points and those on JPMorgan Chase fell 1 basis point to 78.5 basis points, CMA prices show.

Swaps tied to Goldman Sachs Group declined 1 basis point to 132 basis points and those linked to Morgan Stanley were unchanged at 157 basis points, CMA prices show.

Purchases of previously owned US homes fell 7.2 per cent in January, the second-largest decline ever, to an annual pace of 5.05 million, the National Association of Realtors said Friday in Washington. In December, sales decreased a record 16.2 per cent. The median sales price was unchanged from the same month last year, the group said.

The cost to protect from default on Simon Property Group debt fell 1 basis point to 157 basis points, CMA prices show.

The real estate investment trust was cut to "deteriorating" from "stable" by Chicago-based research firm Gimme Credit.

The US economy's prospects largely depend on recoveries in the housing market and employment, said Jim Keegan, chief investment officer at Seix Investment Advisors in Upper Saddle River, New Jersey.

"To us, it's about employment and housing," Keegan said. Seix advises the RidgeWorth fixed-income funds with about $25 billion in assets.

Cause and effect