U.S. default swaps rally, Countrywide, financials gain

NEW YORK (Reuters) - U.S. corporate credit spreads rallied on Friday after the Federal Reserve cut its primary discount rate by 50 basis points to 5.75 percent, with Countrywide Financial Corp. and financial companies the biggest gainers.

The Fed made the surprise move in an attempt to keep credit flowing and calm jittery global markets.

"Markets got what they were hoping for, which is some more tangible evidence from the Fed that it is not only aware of the stressed conditions in the short-term funding markets, but it is prepared to alleviate them," said Edward Marrinan, head of high-grade credit strategy at JPMorgan in New York.

"The main beneficiaries in credit markets of this announcement are financial institutions, which have been under such intense pressure over the last three weeks," Marrinan said.

The cost to insure the debt of Countrywide's home loan unit with credit default swaps fell to 435 basis points, or $435,000 per year for five years to insure $10 million in debt, from 567 basis points at Thursday's close, according to data from CMA DataVision.

Countrywide's credit default swaps were on a roller-coaster ride on Thursday, with spreads widening to more than 1,000 basis points in early trading on concerns over the company's liquidity, before tightening back to around 470 basis points late in the afternoon.

Washington Mutual Inc.'s credit spreads also tightened, to 145 basis points, from 194 basis points on Thursday, CMA said.

Mortgage insurer Radian Group Inc., which has been trading at distressed levels, also rallied. Its debt protection costs fell to 10 percent the amount of debt insured, from 16 percent on Thursday, in addition to annual payments of 500 basis points.

The cost to insure the debt of U.S. brokers also fell across the board.

Bear Stearns Cos.' credit default swap spreads tightened to around 150 basis points, while Lehman Brothers' debt protection costs fell to around 140 basis points, analysts said.

"This move is primarily designed to ease liquidity conditions; the other problems that contributed to this period of market instability -- subprime mortgages, the forward leveraged finance calendar --- are still out there," Marrinan noted.

"This move helps to restore some stability in the credit and equity markets and sets the stage for a Fed easing at the September 17 FOMC meeting," he added.