Credit traders are hedging like mad amid the stock-market plunge

[NEW YORK] A measure of investors' fear for US bluechip corporate bonds surged the most in almost a year as dropping stock prices spurred investors to cut risk.

The spreads for protecting a basket of investment-grade company notes against default rose as much as 5.4 basis points on Monday to above 55, an 11 per cent change that was the biggest since March 20, according to the Markit CDX North America Investment Grade index. As at 4pm New York time, credit-default swaps referring to more than US$50 billion of indices had traded, including protection on investment-grade US corporate debt and European high-yield debt. That level was around 2.5 times typical daily volume for Mondays.

The move to insure debt comes as investors across markets grow increasingly concerned about the potential for rising US wages to spur inflation and more Federal Reserve rate hikes. Investment-grade and high-yield credit derivative indices saw trading volume soar past 300 per cent of average trading volume for Mondays, according to data compiled by Bloomberg.

In the Asia ex-Japan region, the cost of insuring government and corporate bonds against default rose by about four basis points to 72 basis points on Tuesday in early trading, according to credit-default swap traders. It would be the biggest increase since Sept 20, based on the Markit iTraxx Asia index of credit-default swaps.

The spreads for protecting a basket of high-yield debt against default in the US rose 14 basis points to around 335 basis points, or about US$335,000 for every US$10 million of debt protected, Bloomberg data shows. That's the highest since mid-November.

The yield on the 10-year Treasury note increased one basis point to 2.72 per cent as at 9.36am in Hong Kong on Tuesday. It was as high as 2.88 per cent on Monday, the most since January 2014. S&P futures were little changed, after the S&P 500 fell 4.1 per cent Monday to 2,648.94, its lowest level since December.

BLOOMBERG