U.S. Corporate Credit Swaps Plunge as Lawmakers Set Budget Deal

A gauge of U.S. corporate credit risk decreased the most in more than a year as lawmakers passed a budget deal averting tax increases for most wage earners in the world’s biggest economy.

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 9.1 basis points to a mid-price of 85.2 basis points at 4:17 p.m. in New York, according to prices compiled by Bloomberg. That’s the biggest decline since Nov. 30, 2011.

President Barack Obama said he will sign into law the bill passed by the U.S. House just after 11 p.m. yesterday in Washington, undoing tax increases for more than 99 percent of households that took effect with the new year. The U.S. economic expansion probably will be crimped without being halted by the deal, according to economists at JPMorgan Chase & Co. and Bank of America Corp., easing concern that the economy may tumble into a recession, hindering companies’ ability to repay debt.

“The House passing this budget deal really caused the market to have a sigh of relief, so you get a risk-on rally on the first day of the year,” Michael Kraft, senior portfolio manager at Vanderbilt Avenue Asset Management LLC, said in a telephone interview from New York. “The market likes the fact that a deal has been struck. It was a tremendous first step.”

Manufacturing Expands

The agreement breaks a yearlong impasse over how to avert more than $600 billion in tax increases and spending cuts. The elimination of the payroll tax cut, coupled with higher income taxes on the wealthy, will help clip growth in the first quarter to 1 percent, from 3.1 percent in 2012’s third quarter, according to economists at JPMorgan and Bank of America.

Manufacturing in the U.S. expanded in December at a pace that shows the industry is stabilizing after reaching a three-year low a month earlier. The Institute for Supply Management’s manufacturing index climbed to 50.7 last month from November’s 49.5, the Tempe, Arizona-based group showed today. Fifty is the dividing line between expansion and contraction. The median forecast of economists surveyed by Bloomberg called for a rise to 50.5.

The credit-swaps index typically falls as investor confidence improves and rises as it deteriorates. 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 average relative yield on junk-rated debt fell 9 basis points to 5.02 percentage points today, led by spreads on the bonds of technology companies, which lost 13 basis points to 5.68 percentage 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.

The risk premium on the Markit CDX North American High Yield Index declined 46 basis points to 438.4 basis points, Bloomberg prices show.

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