Bloomberg News

Credit Swaps in U.S. Fall as Fed Signals Stimulus Tool Readiness

August 01, 2012

A gauge of U.S. corporate debt risk declined after the Federal Reserve reiterated its willingness to deliver more stimulus measures if economic conditions fail to improve and said it would leave its benchmark funds rate near zero at least through late 2014.

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 2.8 basis points to a mid-price of 104.7 basis points at 3:32 p.m. in New York, according to prices compiled by Bloomberg.

Fed Chairman Ben Bernanke held off on additional stimulus measures, signaling the central bank will provide additional accommodation as needed to promote a stronger economic recovery, as U.S. consumer spending stalled, manufacturing contracted and economic growth lagged. Investors are concerned that a slowing economy may pressure corporate balance sheets and undermine companies’ ability to repay debt.

“They further accentuated the fact that they are in data dependency mode. The theme is the same: ‘We’ll be watching and if need be, we’ll be there to help,”’ Adrian Miller, director of global markets strategy at GMP Securities LLC in New York, said in a telephone interview.

Economists forecast before today’s policy statement that Fed Chairman Ben S. Bernanke would probably forgo announcing a third round of large-scale asset purchases this week and is more likely to wait until September to unveil plans to buy debt. The Fed said today the economy had slowed and left unchanged its statement that conditions would likely warrant holding its benchmark interest rate near zero “at least through late 2014.”

Manufacturing Contracts

Manufacturing in the U.S. unexpectedly contracted in July, with the Institute for Supply Management’s factory index rising to 49.8, close to the three-year low of 49.7 reached in June. Readings below 50 indicate contraction.

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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