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U.S. Company Credit Risk Climbs to 6-Week High as Treasury Swaps Increase

A benchmark gauge of U.S. corporate credit rise rose to the highest level in more than six weeks as lawmakers failed to agree on budget cuts and as yields on Spanish and Italian sovereign debt climbed.

The Markit CDX North America Investment Grade Index of credit default swaps, which investors use to hedge against losses on corporate debt or to speculate on creditworthiness, added 4.6 basis points to a mid-price of 140.5 basis points at 4:52 p.m. in New York, according to index administrator Markit Group Ltd. The cost of protecting U.S. government debt rose to the highest level in two months.

Traders pushed the measures higher as a U.S. deficit- cutting congressional supercommittee said today it failed to reach agreement, extending partisan gridlock into the 2012 election and setting the stage for $1.2 trillion in automatic spending cuts. The Markit iTraxx SovX Western Europe Index of credit-default swaps on 15 governments rose 9 basis points to 361, compared with an all-time high of 362 reached on Nov. 15, as Moody’s Investors Service said France’s rising financing costs are increasing the nation’s fiscal challenges.

“It seems to be a confluence of factors really, from the background stress European sovereign risk imparts on the market to the more acute questions about the U.S.’s fiscal situation,” Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott LLC in Philadelphia, said in an e-mail.

The U.S. company swap index, which typically rises as investor confidence deteriorates and falls as it improves, has increased from a two-month low of 113.4 basis points on Oct. 27.

Credit-default swaps on U.S. Treasuries increased 2.1 basis points to 52.9, the highest since Sept. 28, according to data provider CMA. That compares with 38 basis points on Oct. 28 and 64 at the peak of the country’s debt-ceiling crisis in July.

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“After months of hard work and intense deliberations, we have come to the conclusion today that it will not be possible to make any bipartisan agreement available to the public before the committee’s deadline,” said panel co-chairmen Representative Jeb Hensarling of Texas and Senator Patty Murray of Washington. Standard & Poor’s cut the U.S.’s rating from AAA to AA+ on Aug. 5 because of a previous stalemate over cuts.

Credit swaps pay the buyer face value if a borrower fails to meet 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: Mary Childs in New York at mchilds5@bloomberg.net

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

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