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Credit Swaps in U.S. Fall on Budget Discussions; Edison Triggers

Dec. 18 (Bloomberg) -- A gauge of U.S. corporate credit risk declined to the least in almost three months on signs of progress in U.S. budget talks.

The Markit CDX North American Investment Grade Index, a credit-default swaps benchmark that investors use to hedge against losses on corporate debt or to speculate on creditworthiness, dropped 2.8 basis points to a mid-price of 89 basis points at 2:01 p.m. in New York, according to prices compiled by Bloomberg. That’s poised for the lowest close since Sept. 19.

The swaps index eased as President Barack Obama proposed a budget plan that would cut about $1.2 trillion in federal spending and raise a similar amount in taxes during the next decade, according to a person familiar with the talks. Signs of progress are reassuring investors that a compromise will bolster the economy, helping companies’ ability to repay debt.

“Something’s going to get done, it looks like,” Jeffrey Gundlach, chief executive officer of Los Angeles-based DoubleLine Capital LP, said today in an interview with Erik Schatzker and Stephanie Ruhle on Bloomberg Television’s “Market Makers.” While it doesn’t address the “fiscal crisis that the U.S. has been looking at for the last several years, this is sort of a down payment on finally some fiscal reform,” he said.

The credit swaps index, which typically falls as investor confidence improves and rises as it deteriorates, is up from this year’s intraday low of 82.7 basis points on Sept. 14. 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.

‘Plan B’

House Speaker John Boehner said he will push a budget “plan B” measure that would include tax increases on income of more than $1 million, while continuing to negotiate with President Obama.

Yields on junk debt, rated below Baa3 by Moody’s Investors Service and lower than BBB- at Standard & Poor’s, reached a record low 6.69 percent yesterday, according to Bank of America Merrill Lynch index data.

The risk premium on the Markit CDX North American High Yield Index fell 10 basis points to 454.5 basis points, poised for the least since Sept. 19, Bloomberg data show.

“I don’t think there’s a credit bubble at this point in time,” Gundlach said. “I just don’t believe, until there are cracks in the credit quality structure of the credit system, that you’re going to see a substantial selloff in the credit market.”

Bond Funds

Investors have funneled a record $460 billion this year into bond mutual funds, according to Cambridge, Massachusetts- based research firm EPFR Global. Company bonds have attracted investors seeking a reprieve from four years of U.S. benchmark interest rates between zero and 0.25 percent, a range that the central bank plans to maintain at least until mid-2015.

Edison Mission Energy’s bankruptcy filing triggered contracts that protect against default, according to the committee of banks and investors that govern credit-default swaps.

The International Swaps and Derivatives Association’s determinations committee said the Chapter 11 filing of the unregulated generating unit of Edison International is a so- called credit event. The panel of the New York-based group will hold an auction to settle the contracts.

Edison Mission

Credit swaps protecting against losses on the debt of Santa Ana, California-based Edison Mission dropped yesterday after it filed for bankruptcy and said it reached agreement on a reorganization plan with holders of its $3.7 billion in debt and its parent. The contracts fell 6.3 percentage points to 46 percent upfront yesterday, according to data provider CMA, which is owned by McGraw-Hill Cos. and compiles prices quoted by dealers in the privately negotiated market.

Zurich-based UBS AG, Switzerland’s biggest bank, submitted the request for a ruling from ISDA’s determinations committee on Dec. 17, the association said on its website.

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