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U.S. Credit Swaps Rise to Highest in 3 Months; Eaton Sells Debt

A gauge of U.S. corporate credit risk reached the highest in more than three months before President Barack Obama meets with lawmakers in an effort to reach a budget accord to avert the so-called fiscal cliff.

The Markit CDX North America Investment Grade Index, a credit-default swaps benchmark that investors use to hedge against losses or to speculate on creditworthiness, climbed 1.8 basis points to a mid-price of 108.5 basis points at 5:49 p.m. in New York, according to prices compiled by Bloomberg. That’s the highest close since 109 basis points Aug. 2.

Investors are concerned that policy makers’ inability to reach an agreement to avoid $607 billion in tax increases and spending cuts may weaken the economic recovery and impair companies’ ability to repay debt. Obama called for Congress to immediately pass an extension of the Bush-era tax cuts for the first $200,000 of annual income for individuals and $250,000 for married couples. He said the rates on earnings above those levels should be allowed to rise when they expire at the end of the year.

“The market is feeling a bit weaker and is focused much more in the U.S. on the fiscal cliff,” Dorian Garay, a money manager for an investment-grade debt fund at ING Investment Management, said in a telephone interview. “Both Europe and the fiscal cliff are large risks right now.”

Obama met with a dozen corporate executives after the press conference and sits down with Democratic and Republican congressional leaders Nov. 16 for opening talks on taxes and spending.

Fed Purchases

Spanish workers staged a second general strike this year as unions across Europe prepared the biggest coordinated protests yet against budget cuts.

A number of Federal Reserve officials said the U.S. central bank may need to expand its monthly purchases of bonds after the December expiration of its program of swapping short-term Treasuries for longer-term debt, according to minutes of their last meeting released today.

The credit-swaps index typically rises as investor confidence deteriorates and falls as it improves. The contracts 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.

MBIA Swaps

Contracts tied to MBIA Insurance Corp. were the most actively traded U.S. company swaps by gross notional value for the week ended Nov. 9, according to the Depository Trust & Clearing Corp., which runs a central credit-swaps repository. Bank of America Corp. yesterday said it is seeking to buy the majority of a $329 million issue of parent company MBIA Inc. (MBI) bonds to block the company’s efforts to distance itself from the cash-strapped insurance unit.

The total gross notional value of all single-name contracts rose 22 percent to $120.8 billion last week, according to the New York-based DTCC.

Eaton Corp. (ETN), the equipment maker that is acquiring Cooper (CBE) Industries Plc, sold $4.9 billion of securities in five parts to help fund its purchase, according to Bloomberg data. The company agreed in May to buy Cooper, a maker of electric-distribution equipment, for $11.8 billion.

The average relative yield on investment-grade debt climbed 1 basis point to 1.3 percentage points, according to data compiled by Bloomberg.

Neiman Marcus

Credit swaps protecting the debt of Neiman Marcus Group Inc. dropped 46.7 basis points to 339.2 basis points as of 3:30 p.m. in New York, according to data provider CMA, which is owned by McGraw-Hill Cos. and compiles prices quoted by dealers in the privately negotiated market. The contracts decreased the most since June 2009, Bloomberg data show.

The company set the interest rate it will pay on a $500 million add-on term loan it’s seeking to refinance debt, according to a person with knowledge of the transaction.

The debt, due in May 2018, will pay interest at 3.5 percentage points more than the London interbank offered rate, said the person, who asked not to be identified because the information is private.

The risk premium on the Markit CDX North America High Yield Index, a measure of U.S. speculative-grade corporate debt risk, rose 12 basis points to a mid-price of 563.7 basis points, Bloomberg prices show.

To contact the reporter on this story: Peter Rawlings in New York at prawlings@bloomberg.net

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

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