Credit Swaps in U.S. Rise; Packaging Corp. Issues Senior Notes

A gauge of U.S. company credit risk rose for the first time in a week as Senate leaders’ debt ceiling talks stalled. Packaging Corp. of America issued $700 million in senior notes.

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 0.5 basis point to 77.3 basis points at 4:10 p.m. in New York, according to prices compiled by Bloomberg.

Majority Leader Harry Reid and Minority Leader Mitch McConnell’s discussions on an agreement are on hold, while House Republicans plan to vote as soon as tonight on a debt-limit increase, two days before the U.S. exhausts its borrowing authority. Both plans would fund the government through Jan. 15 and suspend the debt limit until Feb. 7. President Barack Obama said yesterday the U.S. faces “a good chance of defaulting,” a development that would have a “devastating effect” on the economy.

“Most investors are trying to sit on their hands and not do anything,” Robert Grimm, head of corporate trading at Odeon Capital Group LLC in New York, said in a telephone interview. “This is taking a lot longer and looking a lot sloppier than anybody ever expected.”

The swaps index typically rises 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.

Borrowing Authority

The Treasury expects to exhaust its borrowing authority no later than Oct. 17, leaving the federal government with no more than $30 billion on hand. The Bipartisan Policy Center, a Washington-based nonprofit research group, estimates that the Treasury will actually be unable to pay all the government’s bills on time at some point between Oct. 22 and Nov. 1.

Packaging Corp sold 4.5 percent, 10-year notes that yield 180 basis points more than similar-maturity Treasuries, according to data compiled by Bloomberg.

Proceeds from the sale will be used to finance the company’s $1.27 billion purchase of Boise Inc. (BZ) and to repay debt, according to a filing today with the U.S. Securities and Exchange Commission.

The bonds are rated Baa3 by Moody’s Investors Service and BBB by Standard & Poor’s, Bloomberg data show. Bank of America Corp. and Deutsche Bank AG managed the deal, the Lake Forest, Illinois-based company said in the filing.

The Markit CDX North American High Yield Index, a credit-swaps benchmark tied to speculative-grade bonds, rose 0.5 basis points to 369.8 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 0.8 basis point to 130.4 basis points, according to Bloomberg data. The measure for speculative-grade, or junk-rated debt, fell 1.2 basis points to 658.5.

Investment-grade debt is rated Baa3 or higher at Moody’s and at least BBB- by S&P.

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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