Credit Swaps in U.S. Decline to Five-Month Low After Fiscal Deal

A gauge of U.S. company credit risk fell to the lowest in more than five months a day after Congress voted to raise the U.S. debt limit and re-open the government to end a 16-day partial shutdown.

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 0.7 basis point to 72.8 basis points at 12:39 p.m. in New York, according to prices compiled by Bloomberg. The measure is trading at the lowest level since May 8 in data that adjust for the effects of the market’s shift to a new version of the index last month.

Investors are “reassessing” the value of credit markets after the index dropped 3.5 basis points yesterday as lawmakers reached an agreement to push the debt-ceiling dispute to February and fund the government at Republican-backed spending levels through Jan. 15, according to Kashif Ishaq, head of investment-grade corporate bond trading at Delaware Investments. President Barack Obama signed the bill just after midnight after its passage by Congress.

“People are going back to the drawing board and watching how the market reacts today,” Ishaq said in a telephone interview. Trading “volumes are relatively light,” he said.

Dominion Offering

The swaps 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.

A unit of Dominion Resources Inc. is planning to sell $1.2 billion of debt in a three-part offering that includes $400 million of 30-year bonds as soon as today, according to a person with knowledge of the offering. Dominion Gas Holdings LLC may issue the 30-year debt to yield 112 basis points more than similar-maturity Treasuries, said the person, who asked not to be identified because terms aren’t set.

Dominion created the subsidiary to hold its regulated natural gas companies, and proceeds will be used to repay intercompany borrowings from the parent, Standard & Poor’s said in a statement yesterday assigning an A- rating to the securities.

The risk premium on the Markit CDX North American High Yield Index, a credit-swaps benchmark tied to speculative-grade bonds, fell 3.8 basis points to 351.1 basis points, Bloomberg prices show.

The average extra yield investors demand to hold dollar-denominated, investment-grade corporate bonds rather than similar-maturity Treasuries narrowed 1.3 basis points to 127.6 basis points, Bloomberg data show. The measure for speculative-grade, or junk-rated, debt fell 4.8 to 660.5.

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