Corporate Credit Swaps in U.S. Plunge to Lowest Level Since 2007

A gauge of U.S. company credit risk fell to the lowest level in almost six years, a day after Congress voted to raise the U.S. debt limit and re-open the government to end a 16-day partial shutdown.

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 2.2 basis points to 71.4 basis points at 5:06 p.m. in New York, according to prices compiled by Bloomberg. That’s the lowest level since Nov. 6, 2007, using data that adjust for the effects of the market’s shift to a new version of the index last month.

Investors are speculating that damage from the budget impasse, which Standard & Poor’s said shaved at least 0.6 percent from fourth-quarter 2013 gross domestic product growth and took $24 billion out of the economy, will delay reductions in Federal Reserve stimulus, according to Adrian Miller, director of fixed income strategies at New York-based GMP Securities LLC.

“Today, the tone went from cautious, due to the realization that the shutdown has caused a drag on growth, to another realization that the Fed could be engaged longer term and the addictive nature of the risk market kicked in,” Miller said today in a telephone interview.

The index dropped 3.5 basis points yesterday as lawmakers reached an agreement to push the debt-ceiling dispute to February and fund the government at Republican-backed spending levels through Jan. 15. President Barack Obama signed the bill just after midnight following its passage by Congress.

Dominion Offering

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.

A unit of Dominion Resources Inc. sold $1.2 billion of debt in a three-part offering that included equal $400 million parts of 4.8 percent, 30-year notes that yield 112 basis points more than similar-maturity Treasuries, 1.05 percent, three-year bonds at a 45 basis-point spread and 3.55 percent, 10-year debentures at 97, according to data compiled by Bloomberg.

Dominion created the Dominion Gas Holdings LLC unit to hold its regulated natural gas companies, and proceeds will be used to repay intercompany borrowings from the parent, Standard & Poor’s said in a statement yesterday, assigning an A- rating to the securities.

The risk premium on the Markit CDX North American High Yield Index, a credit-swaps benchmark tied to speculative-grade bonds, fell 9.8 basis points to 345.2 basis points, Bloomberg prices show.

The average extra yield investors demand to hold dollar-denominated, investment-grade corporate bonds rather than similar-maturity Treasuries narrowed 1.5 basis points to 127.3 basis points, Bloomberg data show. The measure for speculative-grade, or junk-rated, debt fell 6.6 to 658.7.

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

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