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U.S. Corporate Credit Swaps Increase; Berkshire to AIG Sell Debt

A gauge of U.S. corporate credit risk rose amid speculation the Federal Reserve may reduce its bond purchases by the end of the year. Berkshire Hathaway Inc. and American International Group Inc. issued bonds.

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 1.7 basis points to a mid-price of 74.5 basis points at 4:19 p.m. in New York, according to prices compiled by Bloomberg.

Fed policy makers have been debating the reduction of $85 billion in monthly bond purchases that have bolstered credit markets. Chicago Fed President Charles Evans said today that the central bank is likely to start tapering asset purchases later this year and end them in mid-2014, reiterating the Fed’s decision will be dependent on economic data.

“There’s a hyper sensitivity to the tapering,” William Larkin, a fixed-income portfolio manager at Cabot Money Management in Salem, Massachusetts, said in a telephone interview. “It has an implication for the corporate bond market because credit spreads are so narrow” that there is “not going to be a shock absorber if rates increase.”

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.

Berkshire Offering

“We’ve seen good improvement in the labor market, there’s no question in my mind about that,” Evans, who is a voting member of the Federal Open Market Committee this year, said in Chicago. “I’m still wanting to see greater evidence that it’s a sustainable improvement.”

Warren Buffett’s Berkshire Hathaway issued its first bonds in three months with a $1 billion, two-part offering.

Berkshire sold $600 million of 0.95 percent, three-year securities to yield 37 basis points more than similar-maturity Treasuries and $400 million of 2 percent, five-year notes at a relative yield of 65 basis points, according to data compiled by Bloomberg. The bonds are expected to be rated Aa2 by Moody’s Investors Service and proceeds will be used to repay debt.

AIG Bonds

AIG sold $1 billion in 3.375 percent, seven-year notes to yield 135 basis points more than similar-maturity Treasuries, Bloomberg data show. Proceeds from the sale, expected to be rated Baa1 by Moody’s, will be used to repay debt and for general corporate purposes, the data show.

The cost to protect against losses on the debt of Barrick Gold Corp. increased to the highest level in more than two weeks as gold prices slumped.

Five-year swaps tied to the Toronto-based miner widened more than any other member of the CDX investment-grade index, according to data compiled by Bloomberg. The contracts increased 14.7 basis points to 299.4 basis points, the highest since July 18, the data show.

The risk premium on the Markit CDX North American High Yield Index rose 7.8 basis points to 371.4 basis points, Bloomberg prices show.

The average extra yield investors demand to hold investment-grade corporate debt instead of similar-maturity Treasuries widened 0.3 basis points to 127.7 basis points, Bloomberg data show. The measure for speculative grade, or junk-rated, securities widened 2.9 basis points to 563.1 basis points.

High-yield, high-risk debt is rated below Baa3 by Moody’s and less than BBB- at Standard & Poor’s.

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