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Corporate Credit Swaps in U.S. Increase on Fiscal Cliff Impasse

A gauge of U.S. corporate credit risk rose from the lowest level in three months as federal budget negotiations foundered.

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, climbed 0.8 basis point to 89.9 basis points at 5:04 p.m. in New York, according to prices compiled by Bloomberg. The measure reached 87.7 basis points yesterday, the lowest intraday level since the latest version of the index started trading on Sept. 20.

The index rose as White House Communications Director Dan Pfeiffer said House Speaker John Boehner’s “Plan B” budget proposal would put “too big a burden on the middle class” and President Barack Obama would veto it, fueling concern that negotiations were deteriorating. Failure to reach a compromise would trigger more than $600 billion in spending cuts and tax increases next month.

“The bah-humbug routine in Washington has been slowly relegated from its status as major global growth threat to little more than a fist fight in which onlookers sense will end with the referee calling a draw but not before both contenders end up with a bloody nose,” Andrew Wilkinson, chief economic strategist at Miller Tabak & Co. in New York, said in an e-mailed note.

Business Confidence

Germany’s Ifo institute’s business climate index, based on a survey of 7,000 executives, climbed to 102.4 from 101.4 in November. That’s the second straight increase after sentiment dropped to a 2 1/2-year low in October. Economists predicted a reading of 102, according to the median of 43 forecasts in a Bloomberg News survey.

The credit swaps index typically falls as investor confidence improves and rises as it deteriorates. 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 of debt.

Yields on junk debt, rated below Baa3 by Moody’s Investors Service and lower than BBB- at Standard & Poor’s, reached a record low 6.68 percent yesterday, according to the Bank of America Merrill Lynch U.S. High Yield Index.

The risk premium on the Markit CDX North American High Yield Index increased 5.9 basis points to 457.5 basis points, Bloomberg data show.

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