Default swaps advance; Morgan Stanley plans benchmark debt

, Bloomberg

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A gauge of U.S. corporate credit risk rose before the Federal Open Market Committee releases minutes for its January meeting and as housing starts declined.

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, increased 1 basis point to a mid-price of 86.4 basis points Wednesday, according to prices compiled by Bloomberg.

The Federal Reserve is scheduled to release minutes of its Jan. 29-30 FOMC meeting at 2 p.m. in Washington. The U.S. central bank said on Jan. 30 it will continue to purchase securities at a rate of $85 billion a month. Minutes of the Fed's Dec. 11-12 gathering showed members divided between a mid- or end-of-year finish to bond purchases.

"Wednesday's Fed minutes may help guide our expectations for when quantitative easing could stop," Jody Lurie, a corporate credit analyst at Janney Montgomery Scott LLC in Philadelphia, said in an e-mail message. That would certainly "change the tone of the index and may add some volatility to the picture."

Total housing starts in the U.S. dropped to an 890,000 rate in January, less than forecast, a Commerce Department report showed Wednesday. The median estimate of 85 economists surveyed by Bloomberg projected total U.S. housing starts would drop to a 920,000 annual rate.

Liquidity Stress

The credit-swaps index typically rises as investor confidence deteriorates and falls as it improves. The 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.

Speculative-grade borrowers are taking advantage of accessible credit markets and low interest rates improving liquidity in the market, Moody's Investors Service said in a Feb. 19 report.

The ratings company's Liquidity-Stress Index, which typically falls when corporations' ability to manage cash needs improves, dropped to a record low of 3 percent in January, analysts led by John Puchalla wrote in the report.

The average relative yield on speculative-grade or junk-rated debt narrowed 0.1 basis point to 498.3 basis points, according to Bloomberg data.

Morgan Stanley

High-yield, high-risk debt is rated below Baa3 by Moody's and lower than BBB- at Standard & Poor's. A basis point is 0.01 percentage point.

Morgan Stanley, the biggest financial brokerage, is planning to offer its second benchmark-size bonds this year.

The bank may sell three-year fixed- or floating-rate notes, or a portion of each, and 10-year debt as soon as Wednesday, according to a person familiar with the transaction. The securities may be rated Baa1 by Moody's, said the person, who asked not to be identified because terms aren't set.

The risk premium on the Markit CDX North American High Yield Index increased 2.3 basis points to 432.7 basis points, Bloomberg prices show.

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