U.S. Corporate Credit Swaps Climb as Fiscal Cliff Deadline Looms

A gauge of U.S. corporate credit risk rose for a second day as the year-end deadline approached with no progress on a deal 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, gained 0.7 basis point to a mid-price of 93.5 basis points at 11:55 a.m. in New York, according to prices compiled by Bloomberg.

The index rose the most in more than a month on Dec. 21 as House Speaker John Boehner dropped a plan to allow higher tax rates on annual income above $1 million. Senator Joseph Lieberman, the retiring Connecticut independent, said yesterday on CNN’s “State of the Union” program he feels “it’s more likely that we will go off the cliff.” The lack of a resolution on a deal is increasing concern that failure to do so will slow the economy and hinder companies’ ability to repay debt.

“The politicians always play this 11th-and-a-half-hour game; hopefully they realize they can’t play that too much anymore,” Adrian Helfert, a Boulder, Colorado-based senior vice president at Smith Breeden Associates who helps oversee $6.5 billion, said in a telephone interview. “It’s highly likely that something gets done. It’s a matter of how much volatility we have to go through to get there.”

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.

The average relative yield on junk-rated debt declined 2 basis points to 5.12 percentage points, led by spreads on the bonds of industrial companies, which narrowed 6 basis points to 5.32 percentage points. The risk premium on the Markit CDX North America High Yield Index advanced 2.8 basis points to 475.5 basis points, Bloomberg prices show.

The Securities Industry and Financial Markets Association recommends trading in dollar-denominated fixed-income securities ends at 2 p.m. New York time today and a full-market close Dec. 25, according to its website.

To contact the reporter on this story: Julia Leite in New York at jleite3@bloomberg.net

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

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