Bloomberg News

Default Swaps in U.S. Fall on Central Banks Stimulus Speculation

June 06, 2012

An index of U.S. corporate credit risk declined by the most in more than two weeks as investors anticipate measures from policy makers to stimulate growth.

The Markit CDX North America Investment Grade Index, a credit-default swaps benchmark that investors use to hedge against losses on corporate debt or to speculate on creditworthiness, dropped 4 basis points to a mid-price of 121.8 basis points at 4:55 p.m. in New York, according to prices compiled by Bloomberg. That’s the biggest fall since a decrease of 5.5 basis points on May 21. Contracts tied to Wells Fargo & Co. (WFC:US) and Chesapeake Energy Corp. (CHK:US) also dropped.

The gauge declined as European Central Bank President Mario Draghi said officials stand ready to act as the sovereign-debt crisis tightens its grip on Europe. Federal Reserve Bank of Atlanta President Dennis Lockhart said extending Operation Twist, the bank’s stimulus program, is an option.

“The index seems to be rallying on the hopes of further action, which seems a bit premature,” said Marc Pinto, head of corporate bond strategy at Susquehanna International Group LLP in New York. “Markets feel that eventually the Europeans will step in and do something.”

The ECB today announced its decision to keep the benchmark interest rate unchanged at a record-low 1 percent, resisting calls for a cut.

“You have to question the sustainability of this rally if you don’t have more concrete action behind it,” Pinto said.

Chesapeake CDS

The cost to protect against losses on the debt of Chesapeake Energy fell as the company was said to be in talks to sell pipelines for more than $4 billion.

Credit-default swaps on the company fell 3.33 percentage points to 7.43 percent upfront as of about 3:30 p.m., according to CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market.

The cost of the Chesapeake swaps contracts means buyers of protection would pay $743,000 initially and $500,000 annually to protect $10 million of debt from default for five years.

Contracts tied to the debt of Wells Fargo declined by 8.8 basis points to a mid-price of 124.1 basis points, Bloomberg prices show.

The swaps gauge typically falls as investor confidence improves and rises as it deteriorates. 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.

To contact the reporter on this story: Sridhar Natarajan in New York at

To contact the editor responsible for this story: Alan Goldstein at

The Good Business Issue

Companies Mentioned

  • WFC
    (Wells Fargo & Co)
    • $55.28 USD
    • -0.06
    • -0.11%
  • CHK
    (Chesapeake Energy Corp)
    • $19.71 USD
    • -0.13
    • -0.66%
Market data is delayed at least 15 minutes.
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