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Credit Swaps in U.S. Ease on Budget Talks; Bond Sales at Record

A gauge of U.S. corporate credit risk fell to the least in almost two months as investors weighed prospects for a budget deal in Washington.

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, declined 3.3 basis points to a mid-price of 91.9 basis points at 6 p.m. in New York, according to prices compiled by Bloomberg. That’s the lowest level since Oct. 18.

President Barack Obama and House Speaker John Boehner met at the White House for discussions on avoiding more than $600 billion in spending cuts and tax increases that take effect next month without action by Congress and threaten to slow the world’s largest economy. Obama is considering a possible budget concession on Social Security cost-of-living increases after Boehner dropped his opposition to raising tax rates for some top earners, two people familiar with the talks said.

“All that’s coming down to progress on the fiscal cliff,” Anthony Valeri, a market strategist in San Diego at LPL Financial, which oversees $350 billion of assets, said in a telephone interview. “The fact that Boehner came out and said he’s open to higher tax rates is the key driver.”

The Congressional Budget Office in Washington says a failure of lawmakers to avert the fiscal cliff may tip the economy back into recession.

The swaps index also decreased after Japan’s Liberal Democratic Party returned to power on calls for more monetary easing. While “markets will view that skeptically, more central bank easing is generally positive for risk assets, and will keep the risk-on tone going despite lingering concern,” Valeri said.

‘Bad Idea’

The credit-swaps index, which typically falls as investor confidence improves and rises as it deteriorates, declined for the first time in three business days as investors positioned for a potential selloff in investment-grade credit stemming from the U.S. budget situation.

“A bunch of folks were buying protection late last week trying to play fiscal cliff,” so as the markets rally on the Japanese election and prospects for a budget deal improving, investors are “realizing that being short risk is a bad idea,” said Ashish Shah, the head of global credit investment at New York-based AllianceBernstein LP, which oversees $245 billion in fixed-income assets.

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.

Sales Record

Corporate bond sales from the U.S. to Europe and Asia surpassed 2009’s record today to reach $3.9 trillion this year as borrowing costs plunged to the lowest ever. Global issuance is up from $3.29 trillion last year and $3.23 trillion in 2010, according to data compiled by Bloomberg.

The number of high-yield companies that Standard & Poor’s has upgraded to investment grade increased by two to 26 since the last reporting period, accounting for $60.5 billion of rated debt, Diane Vazza, head of S&P’s global fixed-income research, said in a note dated today.

Companies have been downgraded to junk at a faster rate, with 40 so far this year through Dec. 10, S&P said in the note.

The risk premium on the Markit CDX North American High Yield Index fell 16.8 basis points to 464.5 basis points, Bloomberg data show. That compares with the one-year low of 445.4 basis points.

“We’re at a near-term peak,” Valeri said. “We’d need another catalyst to break through that. This is as much improvement as we’re likely to see. I don’t think the market in general is looking for an additional rally here, but a lot of good news is priced in.”

Edison Mission

Credit swaps protecting against losses on the debt of Edison Mission Energy dropped after the unregulated generating unit of Edison International filed for bankruptcy and said it reached agreement on a reorganization plan with holders of its $3.7 billion in debt and its parent.

The contracts declined 6.3 percentage points to 46 percent upfront as of 4:30 p.m. in New York, according to data provider CMA, which is owned by McGraw-Hill Cos. and compiles prices quoted by dealers in the privately negotiated market.

Under the agreement, Edison International will transfer its stake in Edison Mission Energy to unsecured creditors, the unit said in a statement today. The Santa Ana, California-based company listed $5.13 billion in assets and $5.09 billion in liabilities in Chapter 11 papers filed today in U.S. Bankruptcy Court in Chicago.

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