Credit Swaps in U.S. Reach Five-Month Low on Plan to End Impasse

A gauge of U.S. company credit risk fell to the lowest level in almost five months as the Senate crafted a deal to end the government shutdown and raise the debt ceiling.

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, decreased 3.4 basis points to 73.7 basis points as of 4:55 p.m. in New York, according to prices compiled by Bloomberg. That’s the least since May 21 in data that adjusts for the effects of the market’s shift to a new version of the index last month.

Senate Majority Leader Harry Reid and Minority Leader Mitch McConnell reached an agreement to end the 16-day government shutdown and extend U.S. borrowing authority, which runs out tomorrow. The Senate and House plan to vote on the deal later today, and Jay Carney, the White House Press secretary, said President Barack Obama supports the deal.

“Even if it’s a short-term solution, it gets you to the next hurdle,” Matthew Duch, who helps oversee $12 billion as a money manager at Bethesda, Maryland-based Calvert Investments Inc., said in a telephone interview.

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

Senate Agreement

The framework negotiated by Reid and McConnell would fund the government through Jan. 15, 2014, and suspend the debt limit until Feb. 7, setting up another round of confrontations. House Speaker John Boehner said in a statement that Republicans won’t block the Senate compromise.

House Republicans’ inability to come up with their plan to raise the debt limit before U.S. borrowing authority lapses tomorrow meant that the House would have to accept whatever Senate leaders come up with, Representative Kevin Brady of Texas, a senior House Republican, said in a Bloomberg Television interview earlier today.

“This party is not uniting behind our core issues,” Brady said. “As a result, I think we are all frustrated with our ability to impact this overall agreement.”

Wm. Wrigley Jr. Co., the manufacturer of Juicy Fruit and Altoids acquired by Mars Inc., sold $3 billion of three-, four-, five-, six- and seven-year senior notes, according to data compiled by Bloomberg.

Default Rate

The speculative-grade default rate in the U.S. will be “relatively stable” over the next year after ending the third quarter at 2.6 percent, according to Moody’s Investors Service.

The credit rater forecast a high-yield default rate at year-end of 2.7 percent, declining to 2.6 percent by September 2014, according to a report today. The rates compare with a cyclical peak of more than 14 percent in late 2009 and a 20-year average of 4.5 percent.

The Markit CDX North American High Yield Index, a credit-swaps benchmark tied to speculative-grade bonds, fell 13.8 basis points to 354.4 basis points, Bloomberg prices show.

The average extra yield investors demand to hold dollar-denominated, investment-grade corporate bonds rather than similar-maturity Treasuries tightened 1.4 basis points to 129 basis points, Bloomberg data show.

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

Before it's here, it's on the Bloomberg Terminal.