US corporate bond yield spreads over Treasuries tightened on Friday as US Treasuries sold off after the government reported a much smaller-than-expected drop in May nonfarm payrolls. But while spreads tightened, cash bond prices moved sideways, with investors sitting tight after a heavy week of new supply.
"The investment grade corporate bond market to me feels like it is taking a breather," said Mark Freeman, portfolio manager with Westwood Holdings Group in Dallas, Texas. "The buy side and sell side are trying to digest all the activity that has taken place in the past couple of weeks," he said.
Investors dumped US Treasuries in favour of other asset classes after the government said US employers cut 345,000 jobs last month, the fewest since September and far less than the 520,000 consensus forecast. Friday's selloff in Treasuries was the latest in a weakening trend for government debt as the market continues to make room for a river of supply. Signs that an economic recovery may be around the corner is curbing interest in the relative safety of Treasuries.
The Federal Reserve will likely be concerned if the US 10-year Treasury note's yield rises to 4 percent which could, in turn, threaten any economic revival, Freeman said. A move of the benchmark Treasury note's yield above that level could also put upward pressure on corporate bond yields, because it would signal inflation dangers emanating from the government's hefty debt issuance, said Freeman.
Meanwhile, few doubt that the flow of new US corporate bond sales is likely to end but the pace may ease a bit as the end of the second quarter approaches. The success of new debt sales in recent months has prompted many issuers to take advantage of the highly liquid primary market while the going is good. All tranches in Express Scripts Inc's new three-part $2.5 billion note sale rallied between 60 and 75 basis points over comparable Treasuries on Friday, a buy side trader said.
The $1 billion three-year and five-year tranches tightened to about 315 basis points while the $500 million 10-year tranche tightened to around 300 basis points over Treasuries, the trader said. Express priced the $1 billion three and five-year tranches at 375 basis points and the 10-year tranche at 362.5 basis points over Treasuries, said IFR, a Thomson Reuters service.
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