Credit Swaps in U.S. Fall to Five-Month Low After Fed Decision

A gauge of U.S. corporate credit risk dropped to the lowest level in more than five months after the Federal Reserve said it will expand its holdings of long- term mortgage securities in a bid to boost growth.

The Markit CDX North America Investment Grade Index, a credit-default swaps benchmark that investors use to hedge against losses on corporate debt or to speculate on creditworthiness, fell 5.1 basis points to a mid-price of 85.8 basis points at 4:57 p.m. in New York, according to prices compiled by Bloomberg. That’s the lowest level since March 19.

The measure declined as the U.S. central bank said it will make monthly purchases of $40 billion of mortgage debt in a third round of quantitative easing. Steps to boost the economy may curb investor concern that companies will have difficulty repaying debts.

The Fed needs to find new methods to encourage companies to take risk, as “the transition mechanism has been severed for some time,” Noel Hebert, chief investment officer of Bethlehem, Pennsylvania-based Concannon Wealth Management LLC, said in a telephone interview. “It has not really been translating into the real economy.”

The credit swaps index, which typically falls as investor confidence improves and rises as it deteriorates, has declined from this year’s high of 127.5 on June 4. 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.

The U.S. two-year interest-rate swap spread, a measure of stress in credit markets, decreased 1.9 basis points to 13.75 basis points, the lowest level since April 2010. The measure falls when investors favor assets such as corporate bonds and rises when they seek the perceived safety of government securities.

To contact the reporter on this story: Peter Rawlings in New York at prawlings@bloomberg.net

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

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