Credit Markets Rally Sends Hedging Costs to Another Record Low

For U.S. credit markets, the bullish business cycle is trumping the hawkish monetary policy outlook.

The latest sign: Markit’s CDX North American Investment Grade Index -- a basket of credit default swaps on 125 companies -- fell to as low as 54.2 basis points, a fresh post-crisis trough. That bests the 54.63 basis points notched the previous day -- itself the tightest spread since 2011 on a closing basis.

The six-year average for the index, which offers investors a liquid hedge against a broad downturn in corporate debt, sits at a much-wider 80.4 basis points.

The global upswing in manufacturing, low volatility and tax legislation that will likely limit bond supply and boost cash balances for U.S. businesses all have the potential to add fresh legs to the credit rally, say analysts, offsetting tighter central-bank policies.

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