U.S. High Yield Index gains on bets Fed plans more stimulus

Confidence in high-yield, high-risk debt in the U.S. rose as investors wagered the Federal Reserve will provide more stimulus to the economy.

Markit’s CDX North America High Yield Index, which rises as investor confidence improves, added 0.6 percentage point to 93.9 percent of face value as of 12:12 p.m. in New York, Markit prices show. The benchmark index, has climbed from 91 on Sept. 12, the lowest level in two years.

Investors are anticipating actions that may revive U.S. growth after Standard & Poor’s downgrade of Italy’s credit rating to A from A+ yesterday underscored concerns that Europe’s debt crisis is spreading, said Mikhail Foux, a credit strategist at Citigroup Inc. in New York.

“People are just looking past that and they’re looking at what the Fed is going to do,” he said in a telephone interview.

The Fed’s Open Market Committee ends its two-day policy meeting tomorrow and may announce new measures to boost the economy. The policy tool under consideration, known as “Operation Twist,” in which the Fed would replace short-term Treasuries in its $1.65 trillion portfolio with long-term bonds, is already priced in, according to Foux.

New series

A benchmark indicator of U.S. company credit risk rose as banks, hedge funds and other money managers moved trades into a new series of the index.

Series 17 of the Markit CDX North America Investment Grade Index, which investors use to hedge against losses on corporate debt or to speculate on creditworthiness, traded at 132.5 basis points, 8 basis points wider than Series 16, as of 11:51 a.m. in New York, according to broker Phoenix Partners Group.

New versions of Markit Group Ltd.’s index, which typically rises as investor confidence deteriorates and falls as it improves, are created every six months. Companies are replaced if they no longer have appropriate credit grades, aren’t among the most actively traded borrowers, or fail to meet other criteria. Contracts on individual credits also roll today. The high yield index rolls to a new series on Sept. 27.

Series 16 of the Markit CDX index fell to 124.5 basis points, according to Phoenix data.

In a sign that real estate is struggling to recover, housing starts dropped 5 percent to a three-month low 571,000 annual rate, Commerce Department figures showed today in Washington. The median forecast in a Bloomberg News survey called for a 590,000 pace.

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.