Credit-Default Swaps in U.S. Pare Decline After Bernanke Remarks
A benchmark gauge of U.S. credit risk pared an earlier decline after Federal Reserve Chairman Ben S. Bernanke’s remarks to Congress damped speculation of new asset purchases to help the economy.
The Markit CDX North America Investment Grade Index of credit-default swaps, which investors use to hedge against losses on corporate debt or to speculate on creditworthiness, was little changed at a mid-price of 93.9 basis points at 5:09 p.m. in New York, according to Markit Group Ltd. Earlier the index declined as much as 1 percent.
Bernanke told Congress that maintaining monetary stimulus is warranted, that rising gasoline prices may push up inflation temporarily and that the drop in the unemployment rate has been more rapid than expected. He didn’t imply the Fed would initiate a third round of asset purchases known as quantitative easing, nor extend Operation Twist (TREFTWIS), in which it sells short-term and buys long-term bonds. The U.S. economy expanded at a 3 percent annual rate in the fourth quarter, more than forecast.
“When Bernanke began speaking and well into his testimony the perception was he sounded less dovish,” said Adrian Miller, a fixed-income strategist at GMP Securities LLC in New York. “The market wanted to hear explicit comments about QE3 possibilities as well as what the Fed may do when Operation Twist expires on June 30. Bernanke did neither.”
Bernanke’s comments weren’t necessarily less dovish than prior testimonies, according to Miller.
The swaps gauge, which typically falls as investor confidence improves and rises as it deteriorates, earlier touched 92.7 basis points, the lowest since July on an intraday basis, as the ECB said it will lend banks 529.5 billion euros ($712.2 billion) for 1,092 days, topping the 489 billion euros handed out to 523 institutions in the first three-year operation in December. Economists predicted an allotment of 470 billion euros in today’s tender, according to the median of 28 estimates in a Bloomberg News survey.
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.
The U.S. two-year interest-rate swap spread, a measure of stress in credit markets, was unchanged at 25.88 basis points.
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