Debt Protection Costs Lowest Since Pre-Recession

Those looking to insure against some of the globe’s largest corporate borrowers are in luck: The debt protection cost has dropped to its lowest point since 2007, according to index provider IHS Markit. Investors are betting that strong continued support from central banks will make sure that credit markets keep ticking over.

The Markit’s North American Investment Grade CDX Index, “which reflects the cost of [debt] protection on bonds issued by 125 U.S. companies, fell to [43.81 basis points] last week,” the Financial Times reported. That implies “a premium of $4.38 to insure a $1,000 portfolio of bonds, … its lowest level since July 2007,” according to IHS Markit.

The Index is slightly higher now at 44.62 basis points, but it is still at exceptional heights compared to the last decade overall, IHS Markit noted. An equivalent index, which tracks “European credit default swaps, dropped to [41.26 basis points] on Monday” (Feb. 17), its lowest since November of 2007.

Gavan Nolan, a director at IHS Markit, said the market was being driven by monetary policy expectations, and that everything else was “taking a back seat.” He added that many companies were jumping on the “easy money available,” lengthening the maturity of their debt that leaves default risk low.

Investors have been disturbed lately by the possible “impact on the global economy caused by the coronavirus” hitting China, which caused the CDX Index to climb several notches on Jan. 31.

However, those fears have largely been relieved by strong indicators from the U.S. Federal Reserve and European Central Bank. Both have been committed to keeping interest rates low, while ramping up bond-buying programs. That should ensure a ready supply of cash.

In addition, the Bank of Japan said it’s ready to cut rates even more “into negative territory” if inflation stays below target rates.

The coronavirus, which has impacted tens of thousands in Asia and killed nearly 2,000 as of late-February, has also hit manufacturers and suppliers who often work with China. The economic projections surrounding the region have, therefore, dampened for this quarter.