Credit Swaps in U.S. Rise; Honda Unit Plans $2.75 Billion Sale

A gauge of U.S. company credit risk rose as the U.S. government stayed partially closed for a third day. A unit of Honda Motor Co. (HMC) plans to issue $2.75 billion in a three-part offering.

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 1.2 basis points to 80.9 basis points at 4:15 p.m. in New York, according to prices compiled by Bloomberg.

Investors are bracing for a deceleration in the economy as a result of the shutdown, which has led to furloughed workers and government service stoppages. Economists estimated that a week-long closure may slow fourth-quarter gross domestic product growth by more than 0.25 percentage point, according to a report the Treasury Department released today.

The budget impasse may stretch into next week and “begin to bump up against the debt ceiling problem,” Adrian Miller, director of fixed-income strategy at GMP Securities LLC, wrote in an e-mail. “If there is no clear path to a debt ceiling resolution, I do expect swaps to widen further.”

The index typically climbs as investor confidence deteriorates and falls as it improves. Credit swaps 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.

Treasury Report

The shutdown may exacerbate the consequences of a prolonged debate on raising the $16.7 trillion federal debt limit if it persists, leading to decreased consumer spending and a higher unemployment rate, according to the Treasury.

“If such projections prove accurate, the weaker-than-expected economic expansion would be even more susceptible to the adverse effects from a debt ceiling impasse than prior to the shutdown,” the Treasury wrote in the report.

American Honda Finance Corp., the Japanese automaker’s U.S. finance unit, may sell $1.75 billion of three-year debt, comprising $1 billion of fixed-rate notes yielding 65 basis points more than similar-maturity Treasuries and $750 million of floating-rate securities paying 50 basis points more than the three-month London interbank offered rate, according to a person with knowledge of the transaction, who asked not to be identified because terms aren’t set. It may also issue $1 billion of five-year, fixed-rate debt at a relative yield of 85 basis points.

Three-month Libor was fixed today at 24.3 basis points, or 0.243 percentage point.

The Markit CDX North American High Yield Index, a credit-swaps benchmark tied to speculative-grade bonds, rose 3.3 basis points to 391.7 basis points, Bloomberg prices show.

The average extra yield investors demand to hold dollar-denominated, investment-grade corporate bonds rather than similar-maturity Treasuries tightened 0.2 basis point to 131.6 basis points, Bloomberg data show. The measure for speculative-grade, or junk-rated, debt rose 6.9 basis points to 675.6.

Investment-grade debt is rated Baa3 or higher at Moody’s Investors Service and at least BBB- by Standard & Poor’s.

To contact the reporter on this story: Callie Bost in New York at cbost2@bloomberg.net

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

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