US corporate bond spreads widen

US corporate bond spreads widened on Friday as US Treasuries prices gained after a batch of mixed economic signals raised doubts about the strength of an economic recovery. Corporate bond cash spreads widened by as much as 5 basis points, traders said, while the main index of investment-grade credit default swaps widened by about 6 basis points to 109 basis points, according to data from Markit Intraday.
Friday's spread widening in the corporate bond market was attributed largely to slow trading volumes and investors not wanting to take bets on the last day of the month. "There was a strong rally in Treasuries, which resulted in the spread widening, and you don't have people chasing it," said Timothy Cox, executive director in debt capital markets at Mizuho Securities USA in New York.
Meanwhile, "you have end-of-the-month, and end-of-the-year for some of the Canadian firms, so people are happy to just sit tight," he said. Cox said that while Friday's spread widening was somewhat sharp, there is enough cash on the sidelines to keep the trend in the corporate market steady overall. He said that many investors are waiting for the new issuance to pick up after blackouts for the current earnings season end.
"People are thinking that as soon as we get through this blackout period, we'll see some more (new sales)," he said. Most of this past week's new debt sales was sold by foreign entities. On Friday, Perusahaan Listrik Negara (PLN) sold $1.25 billion of senior notes, while Mexichem sold $350 million of notes.
Elsewhere, billionaire investor Carl Icahn, who had challenged CIT Group Inc's restructuring plan, said he was now backing the company's pre-packaged bankruptcy and would provide an additional $1 billion in credit to the lender. While the move is viewed as a relief to some in that a pre-packaged bankruptcy is seen as logical solution for CIT, the bankruptcy of the lender to small- to medium-sized businesses raises some doubts for debt markets and the economy.
"There has been a tendency for markets to have been overly optimistic, and now there is a reassessment of how optimistic should be we be," said Scott MacDonald, head of research at Aladdin Capital in Stamford, Connecticut. "The looming CIT bankruptcy raises concerns about the ability of small to medium business to get credit," he said.