US corporate bond spreads narrowed on Friday, helped by better-than-expected first-quarter earnings and hopes that government stress tests will not show unanticipated problems at major banks. The main index of investment-grade credit default swaps tightened to 174 basis points from 181 basis points on Thursday, according to data from Markit Intraday.
"Basically, it's all about expectations, and I think this earnings season has turned out a little bit better than people anticipated," said Robert Bishop, portfolio manager at SCM Advisors in San Francisco. With about 26 percent of companies in the S&P 500 already reporting earnings, about 67 percent have topped expectations, according to Barclays Capital.
Among the latest to beat expectations was credit card company American Express, which reported late on Wednesday. Though earnings fell they topped estimates as the company slashed costs by trimming 7,000 jobs and lowering other expenses. Spreads on American Express's 7 percent notes due in 2018 tightened by 16 basis points to 524 basis points over Treasuries, according to MarketAxess.
Corporate bond spreads overall have been on a five-week tightening trend, closing on Thursday at about 520 basis points over Treasuries, or about 66 basis points tighter month-to-date, according to Merrill Lynch data. Improved sentiment about the upcoming government stress test results on major banks is also helping corporate bonds, Bishop said. "There were a few hysterical comments made earlier and now I think people are comfortable that banks will pass or will be provided with more capital at the end of the day," he said.
US regulators are expected to release results of the stress tests on May 4 to show how banks would fare should the US recession prove unexpectedly severe. The results will include a capital recovery plan for banks that regulators determine would need more capital if the recession worsens. A concept paper on the stress tests released on Friday said that most banks are well-capitalised, but they need to hold a "substantial" amount of capital above regulatory requirements to weather a potential worsening of the economic recession.
In the high-yield market, Ford Motor Co's bonds rose after the automaker said it was on track to at least break even in 2011. Ford's 7.45 percent bonds due in 2031 rose by 5.5 cents to 46 cents on the dollar, according to MarketAxess. The cost of insuring debt of Ford's finance arm with credit default swaps fell to 21 percent upfront from 22.5 percent Thursday, plus 500 basis points in annual premiums, according to Phoenix Partners Group.
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