Credit-default swaps on bonds sold by Brazil, Russia, India and China are closing in on those tied to the world’s largest economies, which are piling on debt in an attempt to stoke growth.
The average cost of contracts protecting debt of the so- called BRICs dropped to 41.4 basis points more than the price of swaps on the Group of Seven countries and last week reached the lowest on record. The extra cost to insure the emerging-market nations’ bonds shrunk from 362 basis points, or 3.62 percentage points, in March 2009.
Record demand for emerging-market bonds is driving down the relative yields that investors seek to own the debt. Fixed- income investors are wagering nations including Brazil and China will continue to fuel the global recovery while the U.S., Japan and some of Europe’s biggest countries wrestle with budget deficits and sluggish growth. Developing nations will grow 6.4 percent next year, while developed economies will expand 2.2 percent, the International Monetary Fund said last week.
“Emerging markets don’t have the problems that developed markets are having right now,” said Mikhail Foux, a credit strategist at Citigroup Inc. in New York. “They don’t have the heavy debt load. They’re growing. A lot of them export commodities, and the price of commodities is increasing. Their populations are young and growing. So people feel really good about emerging markets in general.”
The average cost of swaps on BRIC nations has fallen 9 basis points since the start of the year to 116 basis points, while the G-7 average jumped 15 to 74, according to data provider CMA. The G-7 average includes swaps on the U.S., U.K., France, Germany, Italy and Japan. Swaps on Canada are not actively traded.
Extra Yield
Elsewhere in credit markets, a gauge of corporate credit risk in the U.S. tumbled to the lowest since May. The world’s biggest missile maker, Raytheon Co., planned to sell $2 billion of bonds and the cost of protecting Standard Chartered Plc debt from default fell to the lowest in two months after the bank said it would raise about 3.3 billion pounds ($5.2 billion) of equity.
The extra yield investors demand to own company bonds instead of similar maturity government debt fell 1 basis point to 168 basis points, according to Bank of America Merrill Lynch’s Global Broad Market Corporate Index. That’s the lowest since reaching the same level May 13 and down 13 basis points since Aug. 31. Yields averaged 3.36 percent yesterday.
Credit-default swaps on the Markit CDX North America Investment Grade Index, which investors use to hedge against losses on corporate debt or to speculate on creditworthiness, fell 4.2 basis points to a mid-price of 92.8 as of 1:04 p.m. in New York, the lowest since May 3, according to index administrator Markit Group Ltd.
Bad Loans
The contracts, which typically fall as investor confidence improves and decline as it deteriorates, have dropped 13.8 basis points since Sept. 30, CMA data show.
The cost to protect debt issued by JPMorgan Chase & Co. fell 0.2 basis point to 83, according to broker Phoenix Partners Group, after the first of the largest U.S. banks to report earnings said its profit exceeded analyst estimates. Provisions for bad loans shrank offsetting an 11 percent decline in revenue.
Third-quarter net income climbed to $4.42 billion, or $1.01 a share, from $3.59 billion, or 82 cents, in the same period a year earlier, the New York-based company said today in a statement. Twenty-two analysts surveyed by Bloomberg estimated adjusted earnings of 88 cents a share.
“It wasn’t as impressive as everybody was hoping,” said Andrew Kuan, senior trader at Primus Asset Management in New York.
Raytheon Offering
Contracts 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.
Raytheon will issue 5-, 10- and 30-year securities to buy back 5.5 percent debt due November 2012 and 5.375 percent notes maturing in April 2013, the Waltham, Massachusetts-based company said today in a regulatory filing that didn’t specify the size or timing of the offering.
The defense contractor will sell the debt as soon as today, according to a person familiar with the transaction, who declined to be identified to be identified as terms aren’t set.
Credit-default swaps on Standard Chartered fell 2.5 basis points to 78.5, according to data provider CMA, as investors speculated the company won’t sell as many bonds to boost capital. Its shares dropped 1.7 percent to 1,876 pence in London.
Temasek Involvement
Standard Chartered’s 1.25 billion euros ($1.8 billion) of 3.625 percent senior unsecured notes due 2015 rose, pushing the yield versus benchmark government debt 7 basis points lower to 131, according to HSBC Holdings Plc prices on Bloomberg.
Investors in Standard Chartered will be offered one new share at 1,280 pence for every eight they already own, the London-based bank said in a statement today. That’s a third less than yesterday’s closing price. Temasek Holdings Pte, Standard Chartered’s largest shareholder with a 17.7 percent stake, will subscribe to its portion of the sale, the bank said.
In emerging markets, the extra yield investors demand to own corporate bonds rather than government debentures fell 7 basis points to 247 basis points, the lowest since April 26, according to JPMorgan index data.
Outperformance
A record $40.5 billion has flowed into emerging-market bond funds this year, more than four times the full-year high of $9.7 billion in 2005, according to data from research firm EPFR Global.
Emerging economies are outperforming developed nations as European leaders seek to contain debt crises in Greece and Ireland and as the U.S., which has a $1.3 trillion budget deficit, tries to jumpstart an economy that grew at an annual rate of 1.7 percent in the second quarter.
By contrast, Brazil’s economy may expand 7.5 percent this year, up from a previous forecast of 7 percent, Finance Minister Guido Mantega said yesterday in New York.
“Brazil is enjoying high quality, sustainable growth, because it doesn’t generate macroeconomic imbalances,” Mantega said. “Investment today is growing almost three times faster than the economy and we’re increasing productivity.”
‘Flowing Aggressively’
Brazilian companies are selling record amounts of perpetual bonds, which allow issuers to repay principal at their discretion. Mexico sold $1 billion of 100-year-notes last week in the first such sale by a Latin American government.
“Money is flowing more aggressively into emerging-market credit, and the quality of new issues is starting to reflect that,” said Ashish Shah, co-head of global credit investment at AllianceBernstein LP in New York. “That’s the classic way bubbles get built.”
Mexico Central bank Governor Agustin Carstens said the debt won’t lead to a bubble. The Mexican economy is “solid” and inflation has been better than expected, he said in Mexico City yesterday.
An index of swaps on 15 governments in central and eastern Europe, the Middle East and Africa exceeds a benchmark of western European creditworthiness by a record low 50 basis points, down from 161 in February, according to CMA.
China’s Exports
The Markit iTraxx SovX CEEMEA Index has fallen more than 20 basis points since it started trading in January and about 75 from its May peak to 195, while the Markit iTraxx SovX Western Europe Index rose 55 to 144.5, CMA prices show.
The record flow of cash into emerging economies has prompted some policymakers to act to slow the trend. Brazil doubled to 4 percent a tax it charges on some foreign inflows last week. The real has gained 4.5 percent this year to 1.6699 per dollar as prices on the commodities it exports climb. Sugar futures have jumped 52 percent since the end of June and yesterday reached the highest level since February.
China’s economy will likely grow 9.9 percent this year from a year earlier and will grow 10 percent in 2011, the Caijing Magazine reported yesterday, citing a report issued by the Chinese Academy of Social Sciences.
China’s exports are expected to increase by 27.3 percent this year and imports to rise 35.7 percent, bringing the country’s trade surplus to $165 billion this year, Caijing said, citing the report.
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