US corporate bond spreads narrowed on Friday after the August payrolls report suggested the economy is still growing and the Federal Reserve will keep hiking rates at the steady pace investors prefer.
In a holiday-shortened session, spreads on Ford Motor Credit Co's 7 percent notes due 2013 narrowed 0.05 percentage point to 2.10 percentage points, their tightest levels since April 26, according to MarketAxess. Ford Credit is the finance arm of Ford Motor Co.
Employers outside the agricultural sector added 144,000 jobs to their payrolls in August, a touch below analyst expectations of 150,000. Job gains in June and July were also revised upward.
The report solidified expectations of a Fed rate hike in September, which broadly lifted bond yields. The 10-year Treasury yield rose 0.07 percentage point to 4.29 percent.
But from the corporate bond perspective, the report was reasonably positive, said Andrew Palmer, head bond portfolio manager at ASB Capital Management in Washington, D.C.
"The report was strong enough to indicate the economy is still expanding, but we're not growing fast enough that the Federal Reserve really has to slow things down," Palmer said.
Corporate bond investors have generally remained sanguine about credit quality, even as the economy has shown signs of sluggishness since the first quarter. The Fed is expected to raise the target federal funds rate to 2 percent by year end, from 1.5 percent now.
Fed officials have said recently they aim to bring the fed funds rates closer to a neutral level, which neither boosts nor drags on the economy.
Corporate bond spreads narrowed last month toward the tight end of the range they've been in since mid-May, even as doubts about the economy have mounted. The average investment-grade corporate bond spread tightened to 0.94 percentage point on August 31, from 0.97 percentage point on August 2, according to Merrill Lynch indexes.
Spreads have narrowed because demand for bonds paying a higher yield than Treasuries has held steady, while issuance has fallen. Meanwhile, issuance of synthetic collateralized debt obligations has increased, which has proven to be another source of demand for credit risk.
But doubts about the economy have risen. Most retailers on Thursday posted sales that failed to beat already-lowered expectations. Friday's jobs report was about in line with expectations, but was a far cry from March or April, when payrolls swelled by more than 300,000.
Trading on Friday stops at 2 p.m. EDT (1800 GMT), ahead of Monday's US Labour day holiday, when bond markets will be closed.
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