US corporate bond spreads were little changed on Friday, maintaining the gains from a three-week rally as investors mulled the slowing pace of economic growth. With companies focusing on reducing their debt loads and keep more cash on hand, corporate bonds are generally viewed as more resilient in a sluggish economy than equities.
The deceleration of US gross domestic product growth to a 2.4 percent rate in the second quarter weighed more on investors' demand for stocks than for corporate bonds, analysts said. "Even with the GDP number coming in at 2.4 percent and ongoing concern about what is going to happen to the US economy over the rest of the year, the bottom line is a lot of good news on earnings trumped trepidation on the outlook for the economy over the near term " said Scott MacDonald, head of research at Aladdin Capital in Stamford, Connecticut.
Generally robust second-quarter corporate earnings have reassured investors that many major companies are in good shape, for now. "Investors wanted to put their money into play here. The corporate bond sector has been more attractive than the equity markets," MacDonald said.
US investment-grade yield spreads over comparable US Treasuries had narrowed to 186 basis points as of Thursday, from a recent wide of 213 basis points on June 11, according to Bank of America Merrill Lynch data. As the pace of issuance has picked up recently, new debt sales have met with a robust reception, traders and fund managers say.
Issuers have sold about $57 billion in US investment-grade corporate bonds so far in July, after selling $331 billion in the first half of the year, according to preliminary Thomson Reuters data. "The primary market is having a barn burning week. You have had a lot of new issuance," MacDonald said.
Among financial firms' new issues, spreads on UBS AG's $2.5 billion of senior bank notes tightened to 182 basis points on Friday according to MarketAxess, from about 192 basis points at Wednesday's sale. In the secondary market, some big industrial companies' spreads were wider on Friday, but this was mostly caused by the fall of government bond yields as that market rallied than by investors selling corporate bonds, said Richard Fulmer, corporate debt trader in Denver with brokerage D.A. Davidson.
He cited robust demand for corporate bonds and expects that to continue next month. As many bond issues get "called" or redeemed early and money is returned to retail investors, they are tending to reinvest in corporate bonds; a pattern that could help spreads tighten in the weeks ahead, Fulmer said. The costs to protect corporate bonds with credit default swaps edged up slightly. The main index of US investment grade credit default swaps traded about 1 basis point wider at 105 basis points.
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