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U.S. Corporate Credit Swaps Advance as Budget Negotiations Stall

A gauge of U.S. corporate credit risk rose the most in more than a month as House Republican leaders scrapped a plan to avert the so-called fiscal cliff, bringing budget negotiations to a standstill.

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 4.3 basis points to a mid-price of 93 basis points at 3:51 p.m. in New York, according to prices compiled by Bloomberg. The index jumped as much as 4.5 basis points earlier, the biggest intraday gain since Nov. 8.

Investor concern is mounting that a failure to reach a compromise on the budget will harm the economy, impairing corporate balance sheets and companies’ ability to repay debt. House Speaker John Boehner dropped a plan to allow higher tax rates on annual income above $1 million, yielding to anti-tax resistance within his own party. House members and senators won’t vote on the end-of-year budget issues until after Christmas, giving them less than a week to reach an agreement to avert more than $600 billion of tax increases and spending cuts set to take effect next year.

“The failure of Speaker Boehner’s plan increases the likelihood that any type of deal that’s done is going to be pretty small and temporary,” Brian Jacobsen, chief portfolio strategist at Wells Fargo Advantage Funds in Menomonee Falls, Wisconsin, said in a telephone interview. “That increases the likelihood that growth next year is going to be subpar, and that isn’t all that great for profits.”

Budget Issues

Boehner said today that members of his Republican caucus refused to back his tax measure because they didn’t want to be accused of raising taxes. Senate Majority Leader Harry Reid said yesterday that his chamber won’t address the end-of-year budget issues until Dec. 27.

The breakdown in budget talks offset a rise in consumer spending and demand for goods. Purchases gained 0.4 percent last month after a 0.1 percent drop in October that was smaller than previously estimated, Commerce Department figures showed today in Washington. Orders for durable goods rose 0.7 percent in November after a 1.1 percent gain the previous month that was larger than previously estimated, according to the Commerce Department.

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

Junk Spreads

The average relative yield on junk-rated debt gained 5 basis points to 5.14 percentage points today, Bloomberg data show. The bonds of energy companies advanced 14 basis points to 4.78 percentage points. High-yield, high-risk debt is rated below Baa3 by Moody’s Investors Service and lower than BBB- at Standard & Poor’s. A basis point is 0.01 percentage point.

The risk premium on the Markit CDX North American High Yield Index surged 19 basis points to 473.3 basis points, Bloomberg prices show. Earlier, the gauge advanced 23 basis points, the biggest intraday jump since Nov. 7.

Credit swaps protecting against losses on the debt of Mohawk Industries Inc. rose 10.6 basis points to 129.5 basis points as of 3:30 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.

The maker of Daltile and Columbia flooring agreed to acquire Italian ceramics manufacturer Marazzi Group SpA for about $1.5 billion in cash and stock to bolster its presence outside the U.S. The purchase from investors including London-based private-equity firm Permira may be completed in the first quarter of 2013 and boost earnings next year, Calhoun, Georgia-based Mohawk said yesterday in a statement.

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