A gauge of U.S. company credit risk fell as Federal Reserve Chairman Ben S. Bernanke outlined possible tools to boost the economy and reiterated the Fed’s readiness to act.
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 1.7 basis points to a mid-price of 111.1 basis points at 4:37 p.m. in New York, according to prices compiled by Bloomberg. Contracts tied to Goldman Sachs Group Inc. (GS:US) declined as the company said second-quarter earnings beat estimates.
Investors were looking for hints from Bernanke on more stimulus plans as a sputtering recovery builds concern that economic growth will stall, hampering companies’ ability to repay debt. Bernanke said today in his semi-annual report on the economy to Congress that the central bank is ready to initiate growth measures to counter what will probably be “frustratingly slow” progress in cutting unemployment, and that asset purchases are among the options.
“We’ve gotten the message pretty clearly that the Fed is prepared to take more action,” Kathy Jones, a fixed-income strategist in New York for Charles Schwab Corp., which has $1.76 trillion in client assets, said of Bernanke’s comments in a telephone interview. “We know that he is frustrated with the pace of growth and we know that he’d like to see unemployment come down, and I think the low levels of inflation give him some room here.”
The Federal Open Market Committee decided last month to extend its program to reduce borrowing costs by increasing the maturity of its balance sheet, known as Operation Twist.
Additional easing tools include further asset purchases, cutting the interest rate the Fed pays on the reserves banks store with it and altering communications on the outlook for interest rates, Bernanke said today in testimony to the Senate Banking Committee in Washington.
There are “different types of purchase programs that could include Treasuries, or could include Treasuries and mortgage- backed securities,” the Fed chairman said in response to questions from Senator Bob Corker, a Tennessee Republican.
Retail sales slumped for a third month in June, data from the Commerce Department showed yesterday, signaling a slowdown in consumer spending with unemployment more than 8 percent. Payroll increases missed forecasts in June and private corporate hiring was the weakest in 10 months as the jobless rate held at 8.2 percent, according to the Labor Department.
Recent economic data have had a “generally disappointing tone,” Bernanke said.
Goldman Sachs, the fifth-biggest U.S. bank by assets, said today net income in the period ended June 30 fell to $962 million, surpassing the highest estimate of 25 analysts surveyed by Bloomberg News.
The cost to guard against losses on the debt of the New York-based company fell 1.1 basis points to a mid-price of 260 basis points, the lowest level in almost two weeks, Bloomberg prices show. Credit-default swaps tied to Goldman Sachs fell as much as 6.1 basis points earlier.
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.
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