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Credit-Risk Gauge Falls From Recent High

Wednesday, 24 Aug 2011 07:32 PM

A gauge of U.S. corporate credit risk fell from the highest level since June 2010 as investors weighed what the Federal Reserve will do to bolster the faltering economy.

The Markit CDX North America Investment Grade Index, which investors use to hedge against losses on corporate debt or to speculate on creditworthiness, declined 1 basis point to a mid-price of 125 basis points as of 5:35 p.m. in New York Wednesday, according to index administrator Markit Group Ltd. The cost to protect Bank of America Corp. debt for five years fell from the highest level since April 2009, while contracts for one year jumped.

The credit swaps index, which typically rises as investor confidence deteriorates, had soared to as high as 129.6 basis points from 96.3 at the end of last month as concern mounts that the global economic recovery is fading and as Europe’s sovereign crisis spreads. Fed Chairman Ben S. Bernanke and other central bankers meet this week in Jackson Hole, Wyoming, as U.S. unemployment holds above 9 percent.

“You do have a number of potential policy headline events that could stem the tide” of negative sentiment, said Rizwan Hussain, a credit strategist at Morgan Stanley in New York.

Contracts protecting against a default by Charlotte, North Carolina-based Bank of America dropped 12 basis points to 372.6 basis points, according to data provider CMA. That means it would cost $372,600 annually to protect $10 million of the debt for five years.

Swaps protecting the debt against losses for one year jumped 24.4 basis points to 460, according to CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market.

An inverted curve signals traders are pricing in a greater probability of credit deteriorating in the shorter term.

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.

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