Bloomberg News

Credit Swaps in U.S. Fall on Extension of Fed’s Operation Twist

June 20, 2012

A benchmark gauge of U.S. corporate debt risk declined as the Federal Reserve said it will extend its program to reduce borrowing costs, known as Operation Twist, through the end of the year.

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 1.5 basis points to a mid-price of 113.9 basis points at 5:36 p.m. in New York, according to prices compiled by Bloomberg. That’s the lowest level since the measure closed at 108.6 basis points on May 11.

The Federal Open Market Committee said today in Washington that it will expand its program to replace short-term bonds with longer-term debt by $267 billion through the end of the year. The current Operation Twist was set to expire this month. Fed policy makers maintained their view that economic conditions will probably warrant “exceptionally low” interest rates at least through late 2014.

The Fed “could have done more, but I think they’re still holding back,” Mirko Mikelic, a money manager at Fifth Third Asset Management in Grand Rapids, Michigan, said in a telephone interview. “The data are not showing that we’re completely reverting back into a recession.”

Asset Purchases

In a news conference following the FOMC statement, Fed Chairman Ben S. Bernanke said the central bank will consider additional stimulus, including asset purchases, if employment stalls. U.S. employers hired 69,000 workers in May, the fewest in a year, as the unemployment rate climbed to 8.2 percent from 8.1 percent, Labor Department data showed.

“If we don’t see continued improvement in the labor market, we’ll be prepared to take additional steps if appropriate,” Bernanke said at the news conference.

The swaps measure rose briefly after the FOMC announcement, probably on speculation that expectations of potential large- scale bond purchases from the Fed, or quantitative easing, had caused the index to decline more than warranted, according to Peter Tchir, founder of New York-based hedge fund TF Market Advisors.

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: Brooke Sutherland in New York at bsutherland7@bloomberg.net

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


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