U.S. Bond Risk Rises as Lawmakers Fail to Agree on Budget Cuts

The cost of insuring U.S. sovereign debt rose to the highest in two months amid a congressional standoff over cutting the budget deficit of the world’s largest economy.

Credit-default swaps on U.S. Treasuries increased 1.5 basis points to 52.5, the highest since Sept. 29, according to CMA prices at 3 p.m. in London. That compares with 38 basis points on Oct. 28 and 64 at the peak of the country’s debt-ceiling crisis in July. An increase signals worsening perceptions of credit quality.

A debt-reduction committee with special powers that was supposed to dissolve the gridlock in Washington is on the brink of failure, setting the stage for $1.2 trillion in automatic spending cuts. Standard & Poor’s cut the U.S.’s rating from AAA to AA+ on Aug. 5 because of the previous stalemate.

“It does little for the credibility of the U.S. political system and increases the risk of downgrade at the two agencies which still rate the U.S. as a AAA credit,” said Harpreet Parhar, a strategist at Credit Agricole SA in London.

Credit-default swaps on European governments rose as the region’s debt crisis deepened. Contracts on Belgium jumped 10 basis points to 335, France increased 10 to 232 and Germany rose two to 98, while Italy advanced nine to 537 and Spain rose 10 to 469, according to CMA.

The Markit iTraxx SovX Western Europe Index of swaps on 15 governments increased nine basis points to 361, nearing the record 362 set Nov. 15.

Corporate Debt

The cost of insuring corporate debt also climbed. The Markit CDX North America Investment-Grade Index rose three basis points to 139.

Contracts on the Markit iTraxx Crossover Index of 50 companies with mostly high-yield credit ratings increased 26 basis points to 788.5 basis points, according to JPMorgan Chase & Co. The Markit iTraxx Europe Index of 125 companies with investment-grade ratings was up 8.5 at 197.75 basis points.

The Markit iTraxx Financial Index linked to senior debt of 25 banks and insurers added 11 basis points to 312, the highest since Sept. 12, and the subordinated gauge climbed 19 to 555.

A basis point on a credit-default swap protecting 10 million euros ($13.5 million) of debt from default for five years is equivalent to 1,000 euros a year. Swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements.

To contact the reporter on this story: Abigail Moses in London at Mshanahan3@bloomberg.net

To contact the editor responsible for this story: Paul Armstrong at Parmstrong10@bloomberg.net

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