Credit Swaps in U.S. Hit Five-Month Low on Plan to End Impasse

A gauge of U.S. company credit risk is headed for the lowest closing level in almost five months amid speculation the House will pass a Senate agreement to end the U.S. fiscal impasse.

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, decreased 3.2 basis points to 73.9 basis points at 12:18 p.m. in New York, according to prices compiled by Bloomberg. That would be the lowest close since May 21 in data that adjusts for the effects of the market’s shift to a new version of the index last month.

Senate Majority Leader Harry Reid and Minority Leader Mitch McConnell reached an agreement to end the 16-day government shutdown and extend U.S. borrowing authority, which runs out tomorrow. House Speaker John Boehner will allow a vote on the agreement and it will pass, said Representative Kevin Brady of Texas, a senior House Republican.

“Even if it’s a short-term solution, it gets you to the next hurdle,” Matthew Duch, who helps oversee $12 billion as a money manager at Bethesda, Maryland-based Calvert Investments Inc., said in a telephone interview.

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

Senate Agreement

The framework negotiated by Reid and McConnell would fund the government through Jan. 15, 2014 and suspend the debt limit until Feb. 7, setting up another round of confrontations.

Brady said on Bloomberg Television that he thinks House Republicans’ inability to come up with their plan to raise the debt limit before U.S. borrowing authority lapses tomorrow meant that the House would have to accept whatever Senate leaders come up with.

“This party is not uniting behind our core issues,” Brady said. “As a result, I think we are all frustrated with our ability to impact this overall agreement.”

Fitch Ratings put the U.S. AAA credit grade on a negative watch, citing the government’s inability to raise the debt ceiling in a timely manner.

Wm. Wrigley Jr. Co., the manufacturer of Juicy Fruit and Altoids acquired by Mars Inc., may sell $3 billion in three-, four-, five-, six- and seven-year senior notes as soon as today, according to a person familiar with the offering.

Wrigley Sale

Proceeds from the sale may be used for general corporate purposes and debt repayment, said the person, who asked not to be identified because terms aren’t set.

The debt is rated Baa2 by Moody’s Investors Service.

Corporate defaults in the U.S. declined in the third quarter this year, reversing three consecutive quarters of rising default counts, according to a report today from Moody’s analysts led by Lenny Ajzenman.

There were four defaults of non-financial corporates in the third quarter, down from 11 defaults in the prior quarter and seven defaults in the same quarter a year ago.

The Markit CDX North American High Yield Index, a credit-swaps benchmark tied to speculative-grade bonds, fell 12.9 basis points to 355.3 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 1.4 basis points to 129.1 basis points, Bloomberg data show. The measure for speculative-grade, or junk-rated, debt fell 0.6 basis point to 658.1.

Investment-grade debt is rated Baa3 or higher at Moody’s 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

Bloomberg reserves the right to remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.