US CREDIT-Radian, Ambac, may be biggest movers on Fed

NEW YORK, Oct 30 (Reuters) - Radian Group Inc (RDN.N) and Ambac Financial Corp (ABK.N) may be the biggest winners or losers in the credit markets on Wednesday if the Federal Reserve springs any surprises in its interest rate decision.

The Federal Open Market Committee will announce on Wednesday afternoon whether it is lowering benchmark interest rates further after September's half-percentage-point cut.

A 25-basis-point cut, as most are expecting, will likely lead to only mild improvement in the credit markets. However, if the Fed surprises the market with a 50-basis-point cut, or by leaving rates unchanged, the credit market could see large moves tighter or wider.

"Last rate cut, the real-estate-exposed financial names outperformed on an absolute basis, which is not surprising given that they are the greatest beneficiaries of an easing in monetary policy," Barclays analysts said in a report.

Mortgage insurers and monoline insurers were the main beneficiaries of the Fed action, tightening more than expected, Barclays said. Credit spreads of these companies, including Radian and Ambac, are again trading near their wides, and as such "they are well positioned to tighten if the Fed makes another half a percentage point cut," the analysts said.

Monoline insurers write only a single line of insurance business. They typically invest in investment-grade exposures and benefit from triple-A counterparty credit ratings.

Markets had been pricing in a small chance the Fed would make a 50-basis-point cut, though a report in the Wall Street Journal on Tuesday indicated that policy-makers were not seriously considering such a move. For more see [ID:nT181235].

Radian's credit spreads were the best performer after the September rate cut, tightening by 152 basis points, while Ambac's spreads rallied 127 basis points.

If the Fed makes a half-point cut on Wednesday then credit spreads on Radian and Ambac are likely to tighten by around 159 and 102 basis points, respectively, Barclays said.

If the Fed leaves rates unchanged, however, they risk widening by 211 and 137 basis points, respectively.

The investment grade index could tighten 7.5 basis points if the Fed makes a half-point cut, while no move may send it 10 basis points wider, Barclays said.

CREDIT AT RISK

The market has pinned hopes on the Fed easing rates as a means of potentially limiting the losses arising from the still-deteriorating housing market, which is drying up the liquidity of mortgage lenders and borrowers alike.

"If there is no rate cut at the October meeting, we are inclined to adopt a more bearish outlook for the performance of credit over the balance of this year," JPMorgan analyst Edward Marrinan said in a report.

Without the support of further Fed cuts, pressures stemming from weak housing markets, uncertainty over fourth-quarter earnings by financial companies, questions over the effectiveness of the proposed "super-SIV" and further pressures on consumers as oil prices remain elevated will continue to make investors hesitant to invest in credit, he said.