Credit swaps fall as Bernanke says accommodative policy needed

March 26 (Bloomberg) -- A benchmark gauge of U.S. company credit risk snapped two days of increases as Federal Reserve Chairman Ben S. Bernanke’s comment that accommodative policy is still needed encouraged investors, and on speculation of an increase in Europe’s bailout fund.

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, fell 0.7 basis point to a mid-price of 90.8 basis points at 12:53 p.m. in New York, according to Markit Group Ltd. Credit swaps tied to Textron Financial Corp., the financial arm of Textron Inc., the owner of Cessna Aircraft Co., also declined.

The measure dropped as Bernanke said monetary easing will be required to help bring down the unemployment rate, which is at a three-year low. German Chancellor Angela Merkel, citing “fragility” in Spain and Portugal, gave her first indication she is prepared to allow increased funding to contain the European sovereign-debt crisis, which has been threatening to infect the global financial system.

“Bernanke’s comments will help maintain the calm that existed in the markets during the past several months,” Michael Kraft, senior portfolio manager at Vanderbilt Avenue Asset Management LLC, wrote in an e-mail. “The Fed wants to help build investor confidence by displaying vigilance with respect to keeping rates low.”

The jobless rate is still “elevated” even as the economic outlook has improved, the Federal Open Market Committee said in its March 13 statement. The central bank has said it will keep borrowing rates near zero through late 2014.

Low Rates Risk

“There still remains the risk that rates remain too low for too long, but Bernanke has at least clarified his rationale, which the market seems to be buying for now,” Marc Pinto, head of corporate bond strategy at New York-based Susquehanna International Group, wrote in an e-mail. “He appears ready to use the tools available to him until that jobs number is normalized.”

The Markit iTraxx Europe Index of 125 companies with investment-grade ratings fell 0.5 basis point to 117.4 basis points, its first decline in four days.

Swaps on Textron dropped 2.6 basis points to 30 basis points, according to data provider CMA. The business-jet making unit of the company plans to open a factory in China to tap rising demand in the country, the unit said in a statement last week. Contracts on Textron’s debt have declined by more than 64 percent since the start of the year.

Textron Swaps

Markit rolled out a new version of the CDX index, Series 18, last week after Series 17 reached a more than one-year low of 84.7 basis points on March 19. New versions of the index, which banks, hedge funds and other investors use to hedge against losses or to speculate on creditworthiness, are created in September and March. Companies are replaced if they no longer have appropriate credit grades, aren’t among the most actively traded borrowers or fail to meet other criteria.

Credit swaps typically rise as investor confidence deteriorates and fall as it improves. 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.

Bloomberg News

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