US corporate bonds weakened on Friday after news that the employment rate in May reached the highest since late 2004, oil prices hit another record and on expectations for a pickup in new company bond sales. The US jobless rate rose to 5.5 percent from 5 percent in April, the biggest jump in two decades and its highest since October 2004, the Labour Department said on Friday.
Some 49,000 jobs were cut from payrolls in May, the fifth straight month of job losses. Corporate bond traders also said spreads widened by about 2 basis points on expectations that companies may sell more debt in coming weeks. Companies sold a monthly record of $143 billion in US high-grade corporate debt in May, and more than $10 billion so far in June, according to Thomson Reuters data.
"People are selling to make room for new issues," said Rizwan Hussein, a credit analyst at Morgan Stanley in New York. "There's some expectation for a decent new issue supply calendar next week. Things are generally a little bit wider."
Demand for riskier assets such as high-yield corporate bonds also weakened as oil prices soared by $10 a barrel to a record of over $138 on Friday. Remarks by Israel's transport minister that an attack on Iranian nuclear sites looked "unavoidable" and a Morgan Stanley report predicting $150 oil prices by July 4 also sent crude prices higher.
Still, US junk bond mutual funds reported $264 million of net inflows in the week ended Wednesday, the 10th straight week of inflows to the funds, AMG Data reported late on Thursday.
The inflow was up from $25.6 million of inflows the prior week. Junk bonds are rated below investment grade and carry high yields to compensate for their risks. Reduced fears of financial market turmoil in the wake of Federal Reserve liquidity measures have improved some investors' appetite for riskier securities, attracting inflows to junk bond funds.
Rating companies, however, are becoming more pessimistic about corporate credit quality. The number of global companies at risk of credit downgrades climbed to a record in May amid the global credit squeeze, Standard & Poor's said on Friday. The number of entities at risk of downgrade rose to 738 in May, 25 more than in April, S&P said. Moody's came to similar conclusions in a report on Thursday.
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