US corporate bond spreads widened on Friday as a disappointing jobs report weighed on sentiment and the market digested the biggest week of new supply this year. US private employers added fewer workers to their payrolls in July than expected and hiring in June was much weaker than initially reported, adding to evidence that the economic recovery is failing to gain traction.
The cost of protecting US corporate debt with credit default swaps rose as the jobs report sent stocks lower. The main index of investment-grade credit default swaps climbed to 104 basis points from 102 basis points at Thursday's close, according to Markit Intraday. Spreads in the cash market also widened slightly.
"It's a weaker market but I wouldn't call it a brutal selloff," said Edward Marrinan, head of US macro credit strategy at RBS Securities in Stamford, Connecticut. "Today's weakness is a direct by-product of the disappointing nonfarm payroll report and has raised concerns about the vibrancy of this recovery and the potential threat of a double-dip."
New issuance came to a halt on Friday but may pick up again next week as companies take advantage of low borrowing costs, traders said. Since IBM sold three-year debt earlier this week with a record low coupon of 1 percent, other companies have piled into the new issue market, pushing issuance to nearly $32 billion through Thursday, according to IFR data.
The weakening in all risk assets on Friday "definitely will give issuers reason to pause, but by and large, conditions still remain attractive when one looks at all-in funding costs," Marrinan said. Average corporate bond yields this week were hovering just below 4 percent, their lowest since March 2004 and down from nearly 5 percent at the start of the year, according to Bank of America Merrill Lynch indexes. Falling benchmark Treasury yields have pushed yields lower on all types of bonds, including corporates.
In addition to IBM, two utilities set or matched coupon records this week. Public Service Electric and Gas Co sold 10-year notes at 3.5 percent, tying McDonald's for a record low 10-year coupon, and Northern States Power Minnesota set record lows for five- and 30-year coupons, at 1.95 percent and 4.85 percent respectively, according to IFR, a Thomson Reuters service.
Spreads in the corporate bond market are also unusually tight, especially on higher quality bonds that can weather a sluggish economy well. IBM's notes, sold at a spread of 30 basis points over Treasuries, are now trading around 28 basis points, according to MarketAxess.
Despite the tiny yields and spreads, individual investors added to their holdings of investment-grade corporate bonds in July. For the month, high-grade bond funds had $14.7 billion of inflows, the strongest month of the year, J.P. Morgan said in a report on Friday. However, the tide may be turning, J.P. Morgan said, as inflows have slowed over recent weeks.
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