US corporate bond spreads widened slightly on Friday while the cost of insuring corporate debt fell as investors digested the August jobs report, showing the economy shedding jobs at a faster-than-expected pace.
The Labour Department said the unemployment rate climbed to 6.1 percent in the month, its highest in almost five years and well above the unchanged 5.7 percent reading economists were expecting. Spreads had already widened on Thursday in anticipation of a weak jobs report after ADP Employer Services said its survey showed private employers cut 33,000 jobs in August.
"The corporate bond market hasn't been strong, but we are still just trading on the same news and may have reached the point where it's all built in," said Greg Habeeb, a portfolio manager who oversees $8.6 billion for Calvert Asset Management in Bethesda, Maryland. Corporate bond spreads have set record wide levels for four straight sessions. Strategists said the widening will likely continue.
"As we move into the home stretch for 2008, we expect investment grade credit to trade wider over the coming months," Barclays Capital said in a report. "GDP growth is slowing, housing continues to weaken (albeit the pace of those declines has lessened), and stresses on the consumer have yet to abate," the report said.
San Francisco Federal Reserve President Janet Yellen said she expects the US economy to remain sluggish in the second half of 2008. In a speech to the Rotary Club of Los Angeles, Yellen said she expects a "deepening of the adverse feedback loop" that she has been describing for most of 2008: more joblessness causing more mortgage defaults, tighter credit and further downward pressure on activity and employment.
The main investment-grade credit default swap index narrowed by about 2 basis points to 145.07 basis points, while the high-yield CDS index rose by about a half point to 93 points.
The cost of insuring debt of Lehman Brothers rose early Friday on doubts about the likelihood of an acquisition of the investment bank by state-owned Korea Development Bank. KDB has declined to give any details of talks, and other Korean and Asian banks have denied interest.
Lehman's CDS widened by about 20 basis points to 345 basis points, or $345,000 per year for five years to insure $10 million in debt, according to Phoenix Partners Group. Lehman shares fell early in the session but later reversed to trade up 5 percent. Blackstone Group LP and Kohlberg Kravis Roberts & Co are each looking to buy parts of Lehman's real estate and asset management units, sources familiar with the situation told Reuters.
The cost of protecting Altria Group's debt with credit default swaps rose on news that the cigarette company is in advanced talks to buy smokeless tobacco maker UST Inc. Five-year credit default swaps on Altria traded at 85.75 basis points, or $85,750 a year to protect $10 million of debt, up from 74.72 basis points on Thursday, according to data from Markit Intraday.
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