Credit risk

Credit risk gauge hits 14-month high on Powell comments

(Bloomberg) – A measure of credit risk hit its highest level since November 2020 on Wednesday after Federal Reserve Chairman Jerome Powell said the central bank was ready to raise interest rates in March and could continue to rise to fight inflation.

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The cost of guaranteeing the debt of a basket of high-quality companies against default jumped 1.9 basis points to 60.9 basis points on the credit derivatives market CDX.NA.IG. In the high yield market, a basket of junk credits saw its price drop to around 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 decisions, “the biggest credit fallout may be ahead,” said Dominique Toublan, head of US credit strategy at Barclays Plc. As bond yields rise broadly, “we’ll be paying close attention to fund flows in the coming days to see if that causes any outflows.”

Wednesday’s market moves represented a reversal from the start of the session, when the cost of protecting the basket of high-quality stocks fell 2.5 basis points.

The large intraday reversal is a sign that prices in credit markets are swinging more strongly than before, said Travis King, head of U.S. investment-grade companies at Voya Investment Management.

“You’ll likely see more IG investors using CDX to hedge positions or make tactical calls,” he said.

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