US corporate bonds flat

US corporate bond spreads were unchanged on Friday as a rally lost steam and a weak session in stocks added to negative sentiment, traders said. The main index of investment-grade credit default swaps widened by about 2 basis points to 117 basis points, according to data from Markit Intraday. Stocks fell more than 1 percent after data showing weak US consumer sentiment fuelled doubts about an economic recovery.
Heavy supply has also weighed on corporate bond spreads. Investment-grade issuance has been running at an above-average pace for the past two weeks, at $16.5 billion and $20 billion respectively, Bank of America Merrill Lynch said in a research note on Thursday. High-yield issuance has been especially strong, with over $8 billion this week, the most in the past 14 months, the bank said.
"We had a soft week for spreads this week but we also had the largest number of junk issuers tapping the market since the end of 2006," said John Atkins, analyst at IDEAGlobal in New York. Nineteen separate issuers tapped the market, the highest weekly total since December 2006, he said.
"I think renewed risk appetite is floating a lot of boats," he said, with even some lower-rated issuers now tapping the market by issuing secured debt, he said. Sirius XM Radio Inc, for example, on Thursday sold $257 million of senior secured notes due in 2015 at a yield of 10.375 percent. The notes are rated Caa2 by Moody's Investors Service, one of the lowest ratings above default. Graphic Packaging International, a unit of Graphic Packaging Holding on Thursday added $180 million to its senior notes due in 2017, which are rated in the low single-B range, also a relatively weak category. The notes were priced with a yield of 8.825 percent.
"As the participation rate in the junk debt market increases, I think confidence is returning," Atkins said. Investors have been pouring cash into high-yield mutual funds, partly in response to soaring investment returns that have topped those on equities and other fixed-income assets. Year to date, junk bonds have returned 39.6 percent, while Treasuries have lost 4.3 percent and the Dow Jones industrial average is up just 6.2 percent.