U.S. corporate credit, a good bet

A measure of U.S. corporate credit risk is heading for its biggest monthly drop since October, as the Federal Reserve reassured investors that its monetary policy remains dependent on the economy’s progress.

The Markit CDX North American Investment Grade Index, a credit-default swaps benchmark used to hedge against losses or to speculate on creditworthiness, declined 8.9 basis points for the month to 62.4 basis points, after decreasing 1.2 basis points today as of 1:50 p.m. in New York, according to prices compiled by Bloomberg. That’s the steepest monthly decline since October when the gauge fell 9.1 basis points.

Investors pushed the index lower this month as turmoil in emerging markets eased, consumer confidence increased and Federal Reserve Chair Janet Yellen said yesterday that if there were a “significant change” in the economic outlook, the central bank might reconsider the strategy of gradually reducing its monthly bond purchases, signaling the Fed will continue to support the economy.

“She’s not coming in and trying to do something wildly different. The transition should be rather smooth and has proven to be so,” Matthew Duch, a fund manager who helps oversee $12 billion at Bethesda, Maryland-based Calvert Investments Inc., said in a telephone interview.

The credit swaps measure typically falls as investor confidence improves and rises as it deteriorates. 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.

Economic Growth

Federal Reserve Bank of Philadelphia President Charles Plosser, who votes on policy this year, said the Fed should press on with plans to trim its bond purchases with the economy likely to grow about 3 percent this year.

Gross domestic product grew at a 2.4 percent annualized rate from October through December, compared with the government’s first estimate of 3.2 percent issued last month, revised figures from the Commerce Department showed today.

“I actually am optimistic about the longer-term growth of the economy,” Plosser said today in an interview on Bloomberg Television’s “Surveillance” with Tom Keene.

Consumer confidence in the U.S. improved in February from a month earlier as more consumers grew optimistic about the outlook for the economy. The Thomson Reuters/University of Michigan final index of sentiment rose to 81.6 this month from 81.2 in January. The median estimate in a Bloomberg survey of economists called for the measure to hold at its preliminary reading of 81.2.

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