Bloomberg News

Credit Swaps Fall as Bernanke Says Accommodative Policy Needed

March 26, 2012

A benchmark gauge of U.S. company credit risk snapped two days of increases as Federal Reserve Chairman Ben S. Bernanke’s comment that accommodative policy is still needed encouraged investors, and on speculation of an increase in Europe’s bailout fund.

The Markit CDX North America Investment Grade Index of credit-default swaps, which investors use to hedge against losses on corporate debt or to speculate on creditworthiness, fell 2.5 basis points to a mid-price of 89 basis points at 5:07 p.m. in New York, according to Markit Group Ltd.

The measure dropped as Bernanke said monetary easing will be required to help bring down the unemployment rate, which is at a three-year low. German Chancellor Angela Merkel, citing “fragility” in Spain and Portugal, gave her first indication she is prepared to allow increased funding to contain the European sovereign-debt crisis, which has been threatening to infect the global financial system.

“Bernanke’s comments will help maintain the calm that existed in the markets during the past several months,” Michael Kraft, senior portfolio manager at Vanderbilt Avenue Asset Management LLC, wrote in an e-mail. “The Fed wants to help build investor confidence by displaying vigilance with respect to keeping rates low.”

The jobless rate is still “elevated” even as the economic outlook has improved, the Federal Open Market Committee said in its March 13 statement. The central bank has said it will keep borrowing rates near zero through late 2014.

Low Rates Risk

“There still remains the risk that rates remain too low for too long, but Bernanke has at least clarified his rationale, which the market seems to be buying for now,” Marc Pinto, head of corporate bond strategy at New York-based Susquehanna International Group, wrote in an e-mail. “He appears ready to use the tools available to him until that jobs number is normalized.”

Markit rolled out a new version of the CDX index, Series 18, last week after Series 17 reached a more than one-year low of 84.7 basis points on March 19. New versions of the index, which banks, hedge funds and other investors use to hedge against losses or to speculate on creditworthiness, are created in September and March. 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.

Credit swaps typically rise as investor confidence deteriorates and fall 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.

To contact the reporter on this story: Sridhar Natarajan in New York at snatarajan15@bloomberg.net

To contact the editor responsible for this story: Alan Goldstein at agoldstein5@bloomberg.net


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