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U.S. Company Default Swaps Climb; J.C. Penney Credit Risk Eases

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Sept. 27 (Bloomberg) -- A gauge of U.S. company credit risk rose amid concern that a political impasse over the federal budget may constrain economic growth. The cost to protect the debt of J.C. Penney Co. fell.

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 1.2 basis points to a mid-price of 81 basis points as of 5:01 p.m. in New York, according to prices compiled by Bloomberg.

Investors are concerned that the combined prospect of a budget standoff between the White House and Congress and haggling over the debt ceiling might curb demand for company bonds and stocks, according to Michael Kraft, senior portfolio manager at Vanderbilt Avenue Asset Management in New York.

“Until there’s some perceived progress or some headway in this situation, you’re going to see a little bit of investor apprehension,” Kraft said in a telephone interview.

The U.S. Senate voted to finance the government through Nov. 15 after removing language to choke off funding for the health care law, putting pressure on the House to avoid a federal shutdown set to start Oct. 1.

The swaps measure typically climbs as investor confidence deteriorates and falls as it improves. 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.

J.C. Penney

Credit risk for J.C. Penney fell after the department-store chain announced a share offering to raise as much as $932 million.

Swaps protecting against losses on the debt declined 1.8 percentage points to 19.5 percent upfront as of 10:30 a.m., according to data provider CMA, which is owned by McGraw-Hill Financial Inc. and compiles prices quoted by dealers in the privately negotiated market.

Credit-default swaps tied to the unit of MBIA Inc. that guaranteed some of Wall Street’s most toxic mortgage-linked securities during the financial crisis fell after reaching the highest level in more than four months.

Five-year default swaps tied to debt of MBIA Insurance Corp. decreased 0.8 percentage point to 16.8 percent upfront from the highest level since May 3, CMA data show.

Series 21 of the Markit CDX North American High Yield Index, a credit-swaps benchmark tied to speculative-grade bonds which began trading today, was at 397.5 basis points, Bloomberg prices show. That’s 44.6 basis points higher than Series 20’s closing price of 352.9 basis points.

The average extra yield investors demand to hold dollar-denominated, investment-grade corporate bonds rather than similar-maturity Treasuries widened 0.6 basis point to 132.2 basis points, Bloomberg data show. The measure for speculative-grade, or junk-rated, debt rose 6.1 basis points to 684.

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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