A gauge of U.S. corporate credit risk rose to the highest in a week amid investor concern that lawmakers are running out of time to reach a compromise to avert the so-called fiscal cliff.
The Markit CDX North American Investment Grade Index, a credit-default swaps benchmark that investors use to hedge against losses or to speculate on creditworthiness, increased 1.5 basis points to a mid-price of 102.2 basis points at 5:24 p.m. in New York, according to prices compiled by Bloomberg. That’s poised for the highest closing level since 103 basis points on Nov. 19.
A failure by lawmakers to reach a compromise to avoid $607 billion in spending cuts and tax increases set to take effect next year would heighten investor concern that an economic slowdown will hinder companies’ ability to repay debt. The Congressional Budget Office has said such a scenario could lead to a recession and a higher jobless rate. Senate Majority Leader Harry Reid said little progress has been made in budget talks in Washington.
“The market is 100 percent fixated on the fiscal cliff and no news is probably construed as bad news,” Scott Carmack, a portfolio manager at Leader Capital Corp. in Portland, Oregon, said in a telephone interview. “As we get closer and closer to year-end without an agreement, I think you’ll start to see volatility pick up.”
In Europe, finance ministers eased the terms on emergency aid for Greece. In the latest bid to keep the 17-nation euro intact, the ministers cut the rates on bailout loans, suspended interest payments for a decade, gave Greece more time to repay and engineered a Greek bond buyback.
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.
Walt Disney Co. (DIS), the world’s largest entertainment company, sold $3 billion of bonds in four parts in its first offering in more than nine months. The owner of the ABC and ESPN networks issued $500 million of 0.45 percent, three-year notes, $1 billion of 1.1 percent, five-year bonds, $1 billion of 2.35 percent, 10-year debt, and $500 million of 3.7 percent securities maturing in 2042, according to data compiled by Bloomberg.
The average relative yield on speculative-grade debt climbed 1 basis point to 5.87 percentage points while spreads on the bonds of utility companies widened 44 basis points to 13.3 percentage points, Bloomberg data show. A basis point is 0.01 percentage point.
High-yield, high-risk bonds are rated below Baa3 by Moody’s Investors Service and lower than BBB- at Standard & Poor’s.
Credit swaps protecting against losses on the debt of ConAgra Foods Inc. (CAG) rose to the highest in more than a year, climbing 24.6 basis points to 108.5 basis points as of 4:30 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 maker of Orville Redenbacher’s popcorn and Banquet frozen meals agreed to acquire Ralcorp Holdings Inc. for about $5 billion, creating one of the largest packaged food companies in North America.
Moody’s placed ConAgra on review for a downgrade following the announcement, saying the company will take on at least $6.4 billion of additional debt that will push borrowings to four times its earnings before interest, taxes, depreciation and amortization. The company’s long-term debt is currently rated Baa2, the second-lowest level of investment grade.
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