US corporate bond spreads tightened on Friday, pushing the market to its best weekly performance in at least three weeks after gains in stocks and encouraging economic data improved investor sentiment. The cost of protecting US corporate debt with credit default swaps fell, with the main index of investment-grade credit default swaps tightening to 111 basis points from 113 at Thursday's close, according to Markit Intraday.
A fall in jobless claims and reports of solid sales by some large retailers released this week confirmed the sense that the economy is improving though at a slow rate, said William Larkin, portfolio manager at Cabot Money Management in Salem, Massachusetts.
"For the bond market that is sort of an optimal environment because that means you don't have to worry about the Fed raising short-term rates," he said. With inflation under control and the Federal Reserve keeping interest rates near zero, "reaching for yield is going to be acceptable," he said. Positive economic data helped stocks rise for a fourth straight day, with major indexes headed for the best week in a year.
The rebound followed weeks of selling amid data that had raised fears of a double-dip recession. Also improving the environment for corporate bonds is the fact that companies are hoarding cash as an uncertain outlook for the economy limits business spending, Larkin said. "Their balance sheets are looking very attractive from a bondholder's perspective," he said.
With the durability of the economic recovery still unclear, investors will be watching for clues from second quarter earnings season, which kicks off next week, he said. This week's new corporate bond issues have drawn strong demand and most have tightened in secondary trading, a corporate bond trader said.
Time Warner Inc, for example, attracted an $11 billion order book for its $3 billion debt sale while Florida Gas Transmission Co LLC drew $4.5 billion in orders for an $850 million sale, according to IFR, a Thomson Reuters Service. Time Warner's 3.15 percent notes due in 2015, priced at 140 basis points over Treasuries have tightened to 114 basis points, according to MarketAxess.
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