US corporate bond spreads were unchanged to wider on Friday as heavy issuance gave the market a soft tone and investors showed reluctance to add to holdings this close to year end, traders said. Corporate bond supply year to date has already matched the record annual volume of $960 billion set in 2007, Bank of America Merrill Lynch said in a report on Thursday.
Just $5 billion in supply is expected next week as the market slows for the Thanksgiving holiday, but the pace should pick up to the $15 billion range the following week, the bank said. Issuers have been lured to the market by attractive borrowing costs as yields on investment-grade corporate bonds dipped this week to their lowest since February 2005, or about 4.69 percent on average, according to Merrill Indexes.
Despite the falling yields, cash continues to flow into the corporate bond market, creating an ideal environment for companies to issue debt. "Money is still coming out of money market funds, which are yielding pretty much zero, and it has to go somewhere," said Thomas Houghton, portfolio manager for Advantus Capital Management in St. Paul, Minnesota. "It does not appear to be going into equities all that much. Investment-grade and high-yield have been the main beneficiaries."
Year to date, money market funds have reported $487 billion of net outflows, while investment-grade bonds have attracted $145 billion of net inflows, according to AMG Data Services. Among Friday's bond sales, the Royal Bank of Scotland priced $7 billion of debt while TD Ameritrade Holding Corp priced $1.25 billion.
In the credit derivatives market, D.R. Horton's credit protection costs rose after the No 2 US homebuilder posted a much larger-than-expected quarterly loss. D.R. Horton said its loss narrowed to 73 cents a share in the quarter ended September 30 from $2.53 a share a year earlier, but analysts on average were expecting a loss of just 30 cents a share.
The cost of protecting D.R. Horton's debt for five years with credit default swaps rose to about 231 basis points from 224 at Thursday's close, according to Markit Intraday. The main index of investment-grade credit default swaps was little changed at 102.6 basis points versus 102.0 at Thursday's close, according to Markit Intraday.
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