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Credit Swaps in U.S. Climb; Pacific Gas & Electric Sells Debt

A gauge of U.S. corporate credit risk rose to a two-month high as investors weighed whether the economy is expanding enough to prompt the Federal Reserve to reduce bond purchases. Pacific Gas & Electric Co. sold $750 million of securities to pay down debt.

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, added 1.9 basis points to a mid-price of 87.4 basis points at 4:20 p.m. in New York, according to prices compiled by Bloomberg. That’s the highest level since April 4, when the index reached 88 basis points.

Fed members are debating how and when to curtail the U.S. central bank’s $85 billion monthly bond-buying program, designed to curb borrowing costs and spur growth in the world’s biggest economy. The purchases have pushed investors into riskier assets such as corporate debt in search of higher yields.

“The central point of what’s going on in markets relates back to what Fed policy is going to be and investors’ perception,” Scott MacDonald, head of research at MC Asset Management Holdings LLC in Stamford, Connecticut, said in a telephone interview. “You have a lot of animal spirits in the market.”

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 Index

The risk premium on the Markit CDX North American High Yield Index rose 3.3 basis points to 434.7 basis points, Bloomberg prices show.

Pacific Gas & Electric issued $375 million of 10-year, 3.25 percent notes that yield 110 basis points more than similar-maturity Treasuries and an equal portion of 30-year, 4.6 percent securities with a relative yield of 125 basis points, according to data compiled by Bloomberg.

Proceeds may be used to purchase up to $500 million of the company’s $1 billion of 4.8 percent notes maturing March 2014 and for general corporate purposes, according to a person with knowledge of the offering who asked not to be identified because terms weren’t set at the time. Bank of America Corp., BNP Paribas SA, Citigroup Inc. and CastleOak Securities LP managed the offering, the person said.

The new bonds may be rated A3 by Moody’s Investors Service, Bloomberg data show.

Covenant Quality

The three-month rolling average for Moody’s bond covenant quality index was 3.9 in May, little changed from 3.94 in April, according to a report from analysts led by Alexander Dill yesterday. The index is measured on a five-point scale, with 5 signifying the weakest bondholder protection and 1 the strongest.

While the percentage of bonds rated Ba, which typically have weaker covenants, fell to 21 percent of speculative-grade issuance last month from a record high of 41 percent in April, the covenant quality of lower-rated bonds “materially worsened,” Dill said in a statement.

The average relative yield on speculative-grade, or junk-rated, debt tightened 1 basis point to 547.4 basis points at 4:15 p.m., Bloomberg data show. High-yield, high-risk debt is rated below Baa3 by Moody’s and less than BBB- at Standard & Poor’s.

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