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U.S. Corporate Credit Swaps Increase; Chesapeake Risk Declines

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Jan. 30 (Bloomberg) -- A gauge of U.S. corporate credit risk increased the most in a month after the U.S. economy unexpectedly contracted in the fourth quarter.

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, rose 3.8 basis points to a mid-price of 90 basis points at 4:25 p.m. in New York, according to prices compiled by Bloomberg. The increase is the most since Dec. 28 when the measure advanced 4.6 basis points to 99.4.

Signs of a faltering economy may stoke investor concern that companies’ ability to repay debt will be constrained. Gross domestic product, the volume of all goods and services produced, dropped at a 0.1 percent annual rate, the worst performance since the second quarter of 2009, Commerce Department figures showed today in Washington. A Bloomberg survey of economists projected 1.1 percent growth.

“The GDP numbers are backward looking, but a lot of it had to do with defense spending cuts. On some levels the negative GDP is going to scare some investors and push them to buy insurance,” Scott Carmack, a portfolio manager at Leader Capital Corp. in Portland, Oregon, said in a telephone interview.

The Federal Reserve said today it will keep purchasing securities at the rate of $85 billion a month after the economy lapsed because of temporary forces.

Fed Policy

“Growth in economic activity paused in recent months, in large part because of weather-related disruptions and other transitory factors,” the Federal Open Market Committee said today at the conclusion of a two-day meeting in Washington.

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 cost of protecting Chesapeake Energy Corp.’s debt from losses plunged after the company announced yesterday that Chief Executive Officer Aubrey McClendon would retire. Chesapeake lost as much as 43 percent of its market value in 2012 as scrutiny of McClendon’s financial transactions destroyed investor confidence in management and cratering gas prices drained the company of cash.

Chesapeake Swaps

Five-year default swaps on the Oklahoma City-based company’s debt dropped 67.1 basis points to 389.8 basis points at 4:35 p.m. in New York, Bloomberg prices show. That’s the lowest level since December 2011.

The risk premium on the Markit CDX North American High Yield Index increased 15 basis points to 449.1 basis points, Bloomberg prices show.

The average relative yield on junk-rated debt rose 4.7 basis points to 463.5 basis 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.

To contact the reporter on this story: Madhura Karnik in New York at

To contact the editor responsible for this story: Alan Goldstein at

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