U.S. Credit Risk Almost Cut in Half Amid Treasury Yield Decline
By Wes Goodman and Neal Armstrong Feb 25, 2014 6:43 AM ET13
U.S. Economic Recovery `Pretty Modest': Goolsbee
U.S. credit risk has fallen to about half of what it was four months ago as the Federal Reserve slows its bond-purchase program without stoking an increase in Treasury yields.
The cost to protect U.S. debt against non-payment through credit-default swaps was 26.5 basis points, falling from 46 basis points in October. Germany’s was 25 basis points. The Fed announced in December it would reduce debt purchases by $10 billion a month. Treasury 10-year rates have fallen about 15 basis points since its announcement on Dec. 18, reducing demand from investors seeking to hedge against higher yields.
“The removal of the full speed of Fed buying is not such a risk to the Treasury market,” said John Davies, a U.S. interest-rate strategist at Standard Chartered Plc in London. “With a lot of the background debt-ceiling default fears off the table, it’s understandable the CDS side comes down.”
The benchmark U.S. 10-year yield was little changed at 2.74 percent at 6:41 a.m. in New York, according to Bloomberg Bond Trader data. The price of the 2.75 percent note maturing in February 2024 was 100 1/8.
The difference in cost between five-year credit-default swaps covering the U.S. and Germany narrowed to less than one basis point last week, CMA prices show.
Congress Debate
Traders use the contracts to bet on a borrower’s creditworthiness. The U.S. swaps climbed to 64 basis points in July 2011 as the Congress was deadlocked over increasing the debt ceiling. Standard & Poor’s stripped the U.S. of its AAA debt rating the following month.
Investors held contracts insuring $3.9 billion of Treasuries and $11.6 billion of German bunds as of Feb. 14, according to Depository Trust & Clearing Corp.
The U.S. fiscal deficit narrowed to 3.3 percent of gross domestic product last year from 10 percent in 2009, according to Treasury Department data. Germany had a surplus equivalent to 0.1 percent of GDP at the end of 2012, based on the latest figures from Eurostat, the Luxembourg-based statistical office of the European Union.
The U.S. economy will grow 2.9 percent in 2014, versus 1.7 percent for Germany, based on a Bloomberg survey of economists, outperforming its European counterpart for a third year.
While the Fed is cutting the measures it uses to support the economy, European Central Bank President Mario Draghi has said policy makers in his region are ready to increase stimulus.
more@Bloomberg.com
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