Bloomberg News

U.S. Corporate Credit Risk Index Climbs as Debt Downgrade Looms

July 27, 2011

July 27 (Bloomberg) -- The cost to protect the debt of U.S. companies from losses jumped to the highest in more than a week as concerns grew that the political battle over the federal debt limit would cost the nation its top-level credit rating.

The Markit CDX North America Investment Grade Index, which investors use to hedge against losses on corporate debt or to speculate on creditworthiness, increased 1.7 basis points to a mid-price of 96.2 basis points as of 4:57 p.m. in New York, according to Markit Group Ltd. That’s the highest level since July 19.

Investors warned that the U.S. could be stripped of its top-level sovereign debt grade by a major ratings service even if Congress agrees to raise the government’s debt ceiling before a possible Aug. 2 default. Traders are pushing the swaps index higher as lawmaker support is divided on plans to increase the limit, said Noel Hebert, credit strategist at Mitsubishi UFJ Securities USA Inc.

“It doesn’t look like anybody is going to come to any great compromise,” the New York-based strategist said. “If we get a deal you could see the early reaction be very positive, but you could certainly see it fade out very quickly thereafter.”

The U.S. may lose its highest AAA credit rating if lawmakers don’t reach a solution, Standard & Poor’s said July 14. The “long-term growth rate of the debt” would be the biggest factor in the decision to lower the country’s rating, S&P’s President Deven Sharma told U.S. lawmakers today. The rating company will wait to see a final proposal before acting, he said.

Lack of Stability

Any agreement struck this late will probably push the debt problem forward into next year, when it will have to be addressed again, Hebert said. He doesn’t expect a last-minute deal to provide the long-term stability that would reassure credit investors.

The benchmark credit index, which typically rises as investor confidence deteriorates and falls as it improves, was little changed yesterday as President Barack Obama and Republican House Speaker John Boehner tried to gain backing for their parties’ separate proposals. The gauge has risen from 92.4 on July 21.

Credit swaps pay the buyer face value if a borrower fails to meets its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt.

--Editors: Richard Bedard, Pierre Paulden

To contact the reporter on this story: Will Robinson in New York at wrobinson11@bloomberg.net

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


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