US corporate bonds spread mostly flat

US corporate bond spreads were unchanged overall on Friday, with most bonds stalled in an 11-week trading range as losses in stocks offset a mostly positive second-quarter earnings season.
Bonds of AT&T Corp remained on a widening trend after the long-distance giant on Thursday reported an 80 percent drop in second-quarter profits and said it would no longer compete for traditional residential customers.
Some high-yield bond investors are beginning to look at AT&T bonds, which are now trading at wider yield spreads than some junk bonds rated four notches lower, said Kingman Penniman, president of high-yield research firm KDP Investment Advisors.
"It's a good credit, within high-yield," said Penniman. "It's trading well below where we think the credit quality of the company is."
Still, many high-yield investors are reluctant to buy the bonds because of additional selling pressure possible if a widely expected downgrade to junk occurs by Moody's Investors Service or Standard & Poor's, Penniman said.
"High yield players are going to sit back and watch for a while to see whether the downgrade is reflected in the price," he said.
If AT&T were cut to junk, its $8 billion in debt would make it the fourth-biggest name in the widely followed Merrill Lynch high-yield index, behind Qwest Communications International, El Paso Corp and Charter Communications.
Fitch cut AT&T debt ratings to junk status on Thursday.
Spreads on AT&T bonds bearing an 8 percent coupon due 2031 widened on Friday by about 0.03 percentage point to 3.64 percentage points more than Treasuries, according to MarketAxess.
In the broader corporate bond market, spreads were unchanged, leaving the average corporate bond yielding about 0.95 percentage point more than Treasuries. Spreads have traded within 0.03 percentage point of that level since early May, according to Merrill Lynch.
In the credit derivatives market, the cost of insuring high-grade credits against default, as measured by the Dow Jones CDX.NA.IG Series 2, widened 1 basis point to about 63 basis points. A basis point is 0.01 percentage point.
The Dow Jones industrial average fell 76 points or 0.76 percent to 9974, hurt by disappointing quarterly results from Coca-Cola Co and Microsoft Corp.