Credit Risk Gauge Surges to 14-Month High on Powell Comments




  • In Business
  • 2022-01-26 21:28:27Z
  • By Bloomberg

(Bloomberg) -- A measure of credit risk rose on Wednesday to the highest level since November 2020 after Federal Reserve Chairman Jerome Powell said the central bank was ready to raise interest rates in March and may continue to hike to tackle inflation.

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The cost of guaranteeing the debt of a basket of investment-grade companies against default jumped as much as 1.9 basis points to 60.9 basis points in the market for CDX.NA.IG credit derivatives. In the high yield market, a basket of junk credits saw its price decline to about 106.9 cents on the dollar, the lowest level since November 2020, according to the CDX.NA.HY index.

While CDX reacted quickly to the Fed's moves, "the bigger fallout in credit could be to come," said Dominique Toublan, head of U.S. credit strategy at Barclays Plc. With bond yields broadly rising, "we will pay careful attention to the fund flows in the coming days to see if this causes outflows."

Wednesday's market moves represented a reversal from earlier in the session, when the cost of protecting the investment-grade basket had fallen as much as 2.5 basis points.

The big intraday reversal is a sign that prices in credit markets are swinging more wildly than they had before, said Travis King, head of U.S. Investment-Grade Corporates at Voya Investment Management.

"You'll probably see more IG investors using CDX to hedge positions or make tactical calls," he said.

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