U.S. Credit Swaps Fall for 10th Day, Longest Drop in Four Years

The cost of protecting bonds from default in the U.S. fell for a 10th straight trading day, the longest streak since October 2006, as the Federal Reserve kept its plan to buy $600 billion of Treasuries through June.

The Markit CDX North America Investment Grade Index, which investors use to hedge against losses on corporate debt or to speculate on creditworthiness, fell 0.6 basis points to a mid- price of 85.9 as of 5:42 p.m. in New York, according to index administrator Markit Group Ltd. Credit-default swaps on General Motors Co. climbed after prices on the contracts were quoted for the first time since the U.S. automaker’s bankruptcy.

The credit swaps index, which typically falls as investor confidence improves and rises as it deteriorates, has dropped from 99.4 at the end of November as Fed Chairman Ben S. Bernanke said the central bank may boost purchases of government debt. The central bank is bucking the most intense disapproval of monetary policy in three decades by sticking with efforts to boost growth.

“They’re keeping their steady path,” said John Milne of JKMilne Asset Management, who oversees about $1.8 billion as chief executive officer for the firm in Fort Myers, Florida. “It leads us to like credit and spread product even more.”

The purchases will “promote a stronger pace of economic recovery” and keep prices stable “over time,” the Federal Open Market Committee said in a statement today in Washington. Unemployment is too high, the central bank said, as it repeated its pledge to leave the benchmark interest rate low for an “extended period.”

Target Rate

Fed officials left their target for the federal funds rate, which covers overnight interbank loans, in a range of zero to 0.25 percent, marking two years of the policy.

The bank is “going to continue with the easy money,” said Michael Kraft, senior portfolio manager at Crimson Capital Trading LLC in New York. “There was nothing earth-shattering in the statement.”

The index last fell for 10 straight trading days in the period ended Oct. 26, 2006, Markit data show. The credit swap gauge fell to the lowest since Nov. 5.

“People are bulled up on credit,” said Stephen Antczak, head of U.S. credit strategy at Societe Generale SA in New York. “There’s no fear of defaults. There just isn’t in the near term.”

Investor confidence that companies will be able to make debt repayments has increased on speculation that President Barack Obama’s extension of his predecessor George W. Bush’s tax cuts will help spur economic growth and that Europe’s sovereign debt crisis will be contained.

Default Rate

The global default rate on speculative-grade debt fell to a two-year low of 3.3 percent last month, according to a Dec. 7 report by Moody’s Investors Service.

Contracts protecting GM’s debt increased to a mid-price of 342.5 basis points, from 332.5 earlier, as of 5:28 p.m. in New York, according to Barclays Capital. These are the first swaps levels since the Detroit-based automaker’s bankruptcy last year after nearly a century on the New York Stock Exchange.

Swaps on Dearborn, Michigan-based Ford Motor Co. climbed 3.1 basis points to 283.6, according to data provider CMA.

General Motors Corp. filed for Chapter 11 bankruptcy protection on June 1, 2009, after the failure of New York-based Lehman Brothers Holdings Inc. in September 2008 froze credit markets and helped cause the longest recession since the Great Depression. The company raised more than $20 billion in its return to public stock trading Nov. 18.

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: 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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