Bloomberg News

U.S. Company Credit-Default Swaps Ease Before Bernanke Speech

August 27, 2012

A gauge of U.S. corporate credit risk decreased for a second day as investors await a speech from Federal Reserve Chairman Ben S. Bernanke to gauge the outlook for monetary policy.

The Markit CDX North America Investment Grade Index, a credit-default swaps benchmark that investors use to hedge against losses on company debt or to speculate on creditworthiness, declined 0.7 basis point to a mid-price of 100.3 basis points at 5:12 p.m. in New York, according to prices compiled by Bloomberg. Contracts on Goldman Sachs Group Inc. fell by the most in three weeks.

Most credit investors are focused on Bernanke’s speech in Jackson Hole, Wyoming, on Aug. 31, meaning trading volumes are “likely to be abysmal,” according to Noel Hebert, chief investment officer at Bethlehem, Pennsylvania-based Concannon Wealth Management LLC.

Bernanke probably won’t use the speech to suggest a third round of bond buying is imminent, according to economists including Michael Feroli at JPMorgan Chase & Co. and James O’Sullivan with High Frequency Economics. The central bank’s Jackson Hole symposium was the scene of a 2010 speech that foreshadowed a second round of quantitative easing.

The credit swaps index, which typically falls as investor confidence improves, is up from 98.5 basis points on Aug. 20. The contracts 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.

European Steps

The measure earlier fell by the most since Aug. 16 after German Finance Minister Wolfgang Schaeuble said Germany and France will create a working group to advance cooperation on banking and fiscal union and strengthening of monetary union in Europe. The renewed show of unity by the region’s two biggest economies is reassuring investors that European leaders will take steps to fix the debt crisis, taking pressure off U.S. corporate balance sheets.

Credit swaps tied to Goldman Sachs declined by the most since Aug. 6, according to data provider CMA, which is owned by McGraw-Hill Cos. and compiles prices quoted by dealers in the privately negotiated market. The contracts linked to the New York-based firm decreased 10 basis points to 244.5 basis points, the data show.

Media and entertainment, oil and gas, and health care are the most troubled industries with the highest levels of credit risk, for a third straight month, a research group at Standard & Poor’s said in a note dated today. S&P’s global fixed income research group’s criteria identified 115 companies in those segments.

The U.S. two-year interest-rate swap spread, a measure of stress in credit markets, narrowed 0.23 basis point to 17.9 basis points. The measure, which falls when investors favor assets such as corporate bonds and rises when they seek the perceived safety of government securities, has narrowed from 54.7 in November, the highest since May 2009.

To contact the reporter on this story: Mary Childs in New York at mchilds5@bloomberg.net

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


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