U.S. default costs fall on debt deal hopes

LONDON Fri Oct 11, 2013 4:51am EDT

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LONDON Oct 11 (Reuters) - The cost of insuring against a U.S. debt default dipped on Friday as prospects politicians in Washington will reach a deal to lift the country's debt ceiling gathered pace.

Five-year credit default swaps tightened 10 basis points on the day to 30 bps while one-year CDS was 7 bps narrower at 60 bps, according to data provider Markit.

Still, the fact that one-year CDS was twice the rate of the five-year contract reflected lingering doubts that a deal to raise the country's borrowing limit will be reached by Oct. 17 when the government will effectively run out of cash.

In normal circumstances, it is costlier to buy longer-term credit protection. The current curve inversion - considered a classic sign of credit stress - reflects investors' concern over a looming default.

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California state worker Albert Jagow (L) goes over his retirement options with Calpers Retirement Program Specialist JeanAnn Kirkpatrick at the Calpers regional office in Sacramento, California October 21, 2009. Calpers, the largest U.S. public pension fund, manages retirement benefits for more than 1.6 million people, with assets comparable in value to the entire GDP of Israel. The Calpers investment portfolio had a historic drop in value, going from a peak of $250 billion in the fall of 2007 to $167 billion in March 2009, a loss of about a third during that period. It is now around $200 billion. REUTERS/Max Whittaker   (UNITED STATES) - RTXPWOZ

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