U.S. Credit Swaps Rise as Senate Votes to Retain Spending Cuts

A gauge of U.S. corporate credit risk rose after the Senate rejected a proposal from the Democrats to replace the $85 billion in automatic spending cuts due to begin tomorrow.

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 0.7 basis point to a mid-price of 88 basis points at 4:55 p.m. in New York, according to prices compiled by Bloomberg. The measure, down 0.8 basis point in February, is heading for its fourth straight monthly decline.

Senators turned back a Democratic proposal to stall the spending cuts and no additional congressional action is planned before they start. The across-the-board reductions will total $1.2 trillion over nine years, with $85 billion set to take effect in the remaining seven months of this fiscal year.

“The Senate news gave investors a reason to sell and dashed some hopes for a last minute deal,” Anthony Valeri, a market strategist at San Diego-based LPL Financial, said in an e-mail. The news is “driving some late apprehension,” he said.

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.

Economic Data

Gross domestic product grew at a 0.1 percent annual rate in the fourth quarter, Commerce Department figures showed today in Washington. That was less than the median estimate of 0.5 percent by 83 economists surveyed by Bloomberg.

A separate report from the Labor Department showed initial jobless claims dropped to 344,000 in the latest week, compared with the median estimate of 360,000 by economists. The number of people collecting unemployment insurance fell to the lowest level since June 2008.

The risk premium on the Markit CDX North American High Yield Index rose 3.7 basis points to 440.7 basis points, Bloomberg prices show.

The average relative yield on speculative-grade, or junk- rated, debt rose 1.1 basis points to 505.3 basis points, data compiled by Bloomberg show.

High-yield, high-risk debt is rated below Baa3 by Moody’s Investors Service and less than BBB- at Standard & Poor’s.

To contact the reporter on this story: Madhura Karnik in New York at mkarnik@bloomberg.net

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

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