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Credit Swaps in U.S. Decline; Packaging Corp. Risk Rises on Deal

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Sept. 16 (Bloomberg) -- A gauge of U.S. company credit risk fell to the lowest point in more than a month after Lawrence Summers withdrew his candidacy for chairman of the Federal Reserve. The cost to protect debt at Packaging Corp. of America reached the highest level since June.

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, dropped 2.3 basis points to a mid-price of 74.7 basis points as of 4:18 p.m. in New York, according to prices compiled by Bloomberg. Earlier, the index reached 73.9 basis points, the lowest intraday level since Aug. 6.

Investors are guessing at the timing and magnitude at which the Fed will reduce its monetary stimulus in the final day before the Federal Open Market Committee starts its two-day policy meeting. Traders have speculated that Summers may have pulled back federal stimulus sooner than other candidates, such as Fed Vice Chairman Janet Yellen.

“Summers was seen as more hawkish, while Yellen is not seen as aggressive to tapering,” Kashif Ishaq, head of investment-grade corporate bond trading at Delaware Investments, said in a telephone interview.

Credit swaps 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 index typically falls as investor confidence improves and rises as it deteriorates.

Packaging Corp.

Credit risk for Packaging Corp., the fourth-largest U.S. producer of corrugated shipping boxes, rose after the company agreed to purchase Boise Inc. for $1.27 billion.

Five-year swaps tied to the debt of the Lake Forest, Illinois-based company reached as high as 112.5 basis points, the most since 116 on June 25 on an intraday basis. As of 3:52 p.m. in New York the swaps were up 11.5 basis points to 98.5 basis points, according to data provider CMA, which is owned by McGraw-Hill Financial Inc. and compiles prices quoted by dealers in the privately negotiated market.

The transaction includes $714 million of Boise’s debt and is expected to close in the fourth quarter, the companies said today in a statement.

The risk premium on the Markit CDX North American High Yield Index, a credit-swaps benchmark tied to speculative-grade bonds, fell 11.6 basis points to 361.5, Bloomberg prices show.

The average extra yield investors demand to hold dollar-denominated, investment-grade corporate bonds rather than similar-maturity Treasuries decreased 0.6 basis point to 132 basis points, Bloomberg data show. The measure for speculative-grade, or junk-rated, debt widened 4.9 basis points to 601.9.

Investment-grade debt is rated Baa3 or higher at Moody’s Investors Service and at least BBB- by Standard & Poor’s.

To contact the reporter on this story: Callie Bost in New York at cbost2@bloomberg.net

To contact the editor responsible for this story: Alan Goldstein at agoldstein5@bloomberg.net

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