November 25, 2008 / 4:06 PM / 10 years ago

UPDATE 2-U.S. default risk jumps on govt loan purchase plan

(Updates market action)

By Richard Leong

NEW YORK, Nov 25 (Reuters) - The United States’ default risk jumped to record highs on Tuesday after the government announced new steps to buy consumer loans and related securities in a bid to avert a deep recession.

Together with data showing faster economic contraction in the third quarter, the measures, which are worth up to $800 billion, raised fears over the toll they could take on the government’s credit-worthiness.

“In modest amount, it provides liquidity and takes bad assets off the balance. But anything overdone and the sizes we are getting into here is a significant commitment for the government,” said John Silvia, chief economist with Wachovia Securities in Charlotte, North Carolina.

While concerns about the long-term prospects of the United States’ finances have intensified, investors have not shied away from buying its debt at the moment.

On Tuesday, long-dated Treasuries rallied with the 30-year bond US30YT=RR jumping more than 3 points, as investors anticipated a prolonged need for government debt to earn stable returns in an anemic economic climate. For more, see [US/]

Bets on deterioration in the United States’ ability to meet its debt obligations rose in the credit default swap market.

The cost to insure against $10 million of debt issued by the U.S. government jumped to 47.5 basis points or $47,500 per year for five years, according to credit data company CMA DataVision. This compared with 43.5 basis points or $43,500 late Monday.

Five-year Treasury CDS reached as high as 53.00 basis points or equivalent to $53,000 per year, according to Phoenix Partners.

Meanwhile, credit default swaps insuring $10 million of U.S. Treasuries edged up to a record 50.0 basis points or $50,000 a year for 10 years, versus 49.8 basis points or $49,800 at Monday’s close, CMA DataVision said. (Additional reporting by George Matlock in London, Editing by Chizu Nomiyama)

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