It is far from clear whether or not the Federal Reserve plans to cut interest rates soon, but the markets are voting with their feet and betting on support from the US central bank.
Credit derivatives markets in the US staged something of a relief rally on Tuesday afternoon and followed that up on Wednesday morning with similar moves across European markets, reversing the trend of previous days.
Volatility is certainly not behind traders yet, but the confidence boosting nod and wink from Christopher Dodd, chair of the Senate banking committee, is soothing nerves for now.
Sen. Dodd told reporters after a meeting with Fed chairman Ben Bernanke and US Treasury secretary Hank Paulson that the Fed would use “all the tools” at its disposal to protect the broader economy from financial fall-out.
The US CDX Crossover index, which covers mostly junk-rated corporate debt, closed with the cost of protection on $10m worth of bonds down by $9,500 annually, or 9.5 basis points, to $237,000. The CDX investment grade index was also lower, by about 0.7bp to 71.75bp, according to data from Markit Group.
In Europe, the iTraxx Crossover continued to see moves in both directions, but Wednesday morning went as low as 323.5bp, down from roughly 336bp. Late morning it was trading a touch wider at about 325.5bp.
The iTraxx investment grade list similarly hit a low of about 45bp, but moved back to 45.5bp, down from Tuesday’s close of about 48.5bp.
The words of Senator Dodd were unsurprisingly of most benefit to financial groups, including banks, the monoline insurers that guarantee bonds, and mortgage lenders. All these companies have been hammered in the financial market turmoil, being as they are at the eye of the storm.
In the US, those that saw the biggest falls in their cost of protection included Radian Group, an insurer of mortgage bonds in the main, down 98bp to 576bp, and Countrywide Home Loans, down 90bp to 363bp, according to Markit Group.