Bloomberg News

Credit Swaps in U.S. Fall on Stimulus Expectations From the Fed

June 12, 2012

An index of corporate credit risk fell on speculation that policy makers will take measures to boost growth in the U.S. as the European sovereign debt crisis worsens.

The Markit CDX North America Investment Grade Index, a credit-default swaps benchmark used to hedge against losses on corporate debt or to speculate on creditworthiness, decreased 1.1 basis points to a mid-price of 123.5 basis points at 4:58 p.m. in New York, according to prices compiled by Bloomberg. Contracts linked to Alcoa Inc. and Safeway Inc. (SWY:US) increased.

As the European crisis spread with Fitch Ratings downgrading 18 Spanish banks, the swaps gauge reversed an earlier rise on signs the Federal Reserve might step in with new stimulus measures for the U.S. economy. The policy-setting Federal Open Market Committee is scheduled to meet next week as slowing job growth and the deepening troubles in the euro area restrain growth.

“I’ve been in favor of pretty much any accommodative policy I’ve heard about,” Federal Reserve Bank of Chicago President Charles Evans said in an interview with Betty Liu on Bloomberg Television.

Earlier in the day, the swaps index had increased by as much as 2.3 basis points on concern that escalating strains in Spain, the euro area’s fourth-largest economy may damage corporate creditworthiness worldwide.

Alcoa Suit

“If conditions in Europe continue to deteriorate, credit indexes are going to widen,” David Hinman, co-founder and chief investment officer at SW Asset Management, said in a telephone interview. “This index offers the most liquid way to express a bearish view with a limited downside.”

The cost to protect against losses on the debt of Alcoa Inc. (AA:US) increased to the most in almost five months as the largest U.S. aluminum producer lost a bid to dismiss a lawsuit alleging it paid bribes in Bahrain.

Credit swaps (AA:US) tied to Alcoa rose 11.5 basis points to 376.1 basis points at 5:12 p.m., Bloomberg prices show. Swaps on Safeway climbed 14.2 basis points to 363.6 basis points.

The swaps gauge typically rises as investor confidence deteriorates and falls as it improves. 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 snatarajan15@bloomberg.net

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


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Companies Mentioned

  • SWY
    (Safeway Inc)
    • $34.48 USD
    • 0.11
    • 0.32%
  • AA
    (Alcoa Inc)
    • $15.69 USD
    • 0.84
    • 5.35%
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