U.S. Corporate Credit Swaps Increase as Fiscal Cliff Talks Waver

A gauge of U.S. corporate credit risk rose for a third day as budget talks wavered in Washington, offsetting data that showed home prices climbed by the most in more than two years in October.

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, increased 1.5 basis points to a mid-price of 95 basis points at 4:15 p.m. in New York, according to prices compiled by Bloomberg.

The lack of a resolution on a deal to avert the so-called fiscal cliff is increasing concern that failure to craft an agreement will slow the economy, impairing corporate balance sheets and hindering companies’ ability to repay debt. President Barack Obama plans to leave his Hawaii vacation today and return to Washington, a White House aide said yesterday. Congress will return tomorrow to continue negotiations on a budget.

“Issue one, two and three remain what’s going to happen when people get back to Washington and the fiscal cliff,” John Donaldson, director of fixed income at Radnor, Pennsylvania-based Haverford Trust Co., said in a telephone interview. “That’s priority number one for pretty much everybody. I don’t think there’s enough time for anything other than a Band-Aid.”

Home Prices

The lack of progress in Washington helped offset an advance in home prices. The S&P/Case-Shiller index of property values in 20 cities climbed 4.3 percent from October 2011, the biggest 12-month advance since May 2010, the group said today in New York. The median forecast of 30 economists in a Bloomberg survey projected a 4 percent gain.

U.S. holiday sales growth slowed by more than half this year, MasterCard Advisors SpendingPulse said yesterday. Retail sales increased by 0.7 percent from Oct. 28 through Dec. 24, the research firm said, without providing a dollar figure. Sales grew at a 2 percent pace in the same period a year ago. SpendingPulse tracks total U.S. sales at stores and online via all payment forms.

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.

The average relative yield on junk-rated debt narrowed 1 basis point to 5.13 percentage points today, led by spreads on the bonds of technology companies, which dropped 3 basis points to 5.81 percentage points, Bloomberg data show. 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 rose 7.5 basis points to 483.2 basis points, Bloomberg prices show.

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