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Corporate Credit Swaps in U.S. Hold; J&J Borrows $3.5 Billion

Dec. 2 (Bloomberg) -- A gauge of U.S. company credit risk was little changed. Johnson & Johnson, the AAA rated maker of health-care products from Band-Aids to Listerine, sold $3.5 billion of bonds in its first offering since 2011.

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, held at a mid-price of 69.6 basis points at 5:34 p.m. in New York, according to prices compiled by Bloomberg. The measure has climbed from a six-year low of 68 basis points on Nov. 25.

Manufacturing unexpectedly accelerated in November at the fastest pace in more than two years, pointing to a pickup in business spending that will help propel the U.S. economy in early 2014, bolstering the outlook for company debt.

“The global expansion will remain intact,” Morgan Stanley research strategists led by Jason Draho wrote in their 2014 global outlook. “Equities and corporate bonds are not overvalued, either outright or relative to government bonds.”

The Institute for Supply Management’s index rose to 57.3, the highest since April 2011, from 56.4 a month earlier, the Tempe, Arizona-based group’s report showed today. Readings above 50 indicate growth. The median forecast in a Bloomberg survey of economists was 55.1.

The swaps index typically falls as investor confidence improves and rises 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.

Top Ranking

J&J, one of four U.S. nonfinancial borrowers with a top credit ranking, sold six portions of bonds maturing in three to 30 years, according to data compiled by Bloomberg. Proceeds will be used to repay existing debt, New Brunswick, New Jersey-based J&J said today in a regulatory filing.

The risk premium on the Markit CDX North American High Yield Index, a credit-swaps benchmark tied to speculative-grade bonds, added 0.6 basis point to 340.4, Bloomberg prices show.

The average extra yield investors demand to hold dollar-denominated, investment-grade corporate bonds rather than similar-maturity Treasuries tightened 0.5 basis point to 124.7 basis points, Bloomberg data show. The measure for speculative-grade, or junk-rated, debt fell 3 basis points to 555.8.

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

The U.S. trailing 12-month junk corporate default rate fell for a fifth straight month to 1.9 percent in November, the lowest level since 2011, according to a report from S&P’s global fixed income research group today. That’s down from 2.2 percent in October.

“The rate may hit bottom during the first quarter of 2014 unless there is a spike in defaults during the next few months, which we view as unlikely,” Diane Vazza, head of the group, said in the statement.

To contact the reporter on this story: Mary Childs in New York at mchilds5@bloomberg.net

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

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