U.S. Company Credit Swaps Advance as Fiscal Cliff Deadline Nears

A gauge of U.S. corporate credit risk rose for the fourth time in five sessions on concern lawmakers won’t reach a budget deal to avoid the so-called fiscal cliff before the year-end deadline.

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, climbed 3.6 basis points to a mid-price of 98.3 basis points at 4:47 p.m. in New York, according to prices compiled by Bloomberg. The index advanced 5.6 basis points this week, the most since the five days ended Nov. 9.

President Barack Obama is seeking an up-or-down vote on his proposal to extend tax cuts for annual income up to $250,000, absent a counteroffer from congressional leaders, an official familiar with today’s budget talks said. Lack of progress toward a deal that would avoid more than $600 billion in spending cuts and tax increases set to take effect next year is stoking concern that the economy may tumble into a recession, hindering companies’ ability to repay debt.

“What’s going on in Washington is all you hear about, all everybody talks about,” Robert Grimm, head of high-yield trading at Odeon Capital Group LLC in Greenwich, Connecticut, said in a telephone interview. “I think they’re actually trying to do a deal. Whatever we get, if it’s done in the short run, it’s going to be a watered-down version of what we need.”

Business Activity

The budget deadlock offset an increase in business activity in the U.S. in December. The MNI Chicago Report’s business barometer advanced to a four-month high of 51.6 from November’s 50.4. The median estimate in a Bloomberg survey called for the gauge to rise to 51. A reading of 50 is the dividing line between expansion and contraction.

Pending home sales rose 1.7 percent to 106.4 in November, the highest reading since April 2010, after a revised 5 percent gain in October, the National Association of Realtors reported today in Washington. The median forecast in a Bloomberg survey called for a 1 percent advance.

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 widened 2 basis point to 5.16 percentage points today, led by spreads on the bonds of utility companies, which rose 4 basis points, Bloomberg data show. High-yield, high-risk debt is rated below Baa3 by Moody’s Investors Service and lower than BBB- at Standard & Poor’s. A basis point is 0.01 percentage point.

The risk premium on the Markit CDX North American High Yield Index gained 22.6 basis points to 510.2 basis points, according to prices compiled by Bloomberg.

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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