U.S. Company Credit Risk Falls as Treasury Backup Plan Revealed

The cost to protect the debt of U.S. companies from losses fell as jobless claims dropped and the Treasury planned to give priority to holders of government bonds if lawmakers don’t reach a deal to raise the federal debt limit.

The Markit CDX North America Investment Grade Index, which investors use to hedge against losses on corporate debt or to speculate on creditworthiness, decreased 0.4 basis point to a mid-price of 95.8 basis points as of 5:01 p.m. in New York.

Traders pushed the index lower as applications for unemployment benefits fell by 24,000 to 398,000 in the week ended July 23, Labor Department figures showed today in Washington. The U.S. Treasury is making contingency plans if lawmakers don’t reach a compromise deal to increase the nation’s borrowing limit before a possible default on Aug. 2, an administration official said, who requested anonymity because no announcement has been made.

“Things have been pretty well behaved,” said Noel Hebert, credit strategist at Mitsubishi UFJ Securities USA Inc. in New York. “People seem to just be sitting and waiting to see what we’re going to get,” he said, referring to the possibility of an agreement over the debt ceiling.

The benchmark credit index typically rises as investor confidence deteriorates and falls as it improves. The gauge has risen from 92.4 on July 21 on concern that the nation may lose its highest AAA credit rating.

The “long-term growth rate of the debt” would be the biggest factor in the decision to lower the country’s top-level grade, Standard & Poor’s President Deven Sharma told U.S. lawmakers yesterday. The rating company will wait to see a final proposal before acting, he said.

Credit swaps pay the buyer face value if a borrower fails to meets its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt.

To contact the reporter on this story: Will Robinson in New York at wrobinson11@bloomberg.net

To contact the editor responsible for this story: Alan Goldstein at agoldstein5@bloomberg.net