Friday's disappointing US jobs report added one more potential negative for US credit spreads, which are already facing not only falling stock indexes and rising equity volatility but a growing willingness from companies to take care of shareholders over bondholders.
This week's move by the main investors in Cox Communications to take it private served as a wake-up call to credit investors that even with profits solid, cash balances at record highs and cash flow strong, the coming weeks may see more companies make moves to boost share prices.
Credit analysts at Lehman Brothers noted that "the media sector demonstrated the significant downside potential at current valuations." Now thrown into the mix is the possibility of the economy's robust growth turning sluggish, with just 32,000 jobs being generated in July - the fourth straight monthly slowdown. Not to mention that oil prices remain near records above $44 a barrel.
If coming data suggest that the economy's soft spot extended beyond June, questions about profitability and credit quality going forward will become more acute, strategists said. For now most investors seem content the expansion and positive profit outlook are intact.
Still, the S&P 500 and other stock indexes keep breaking down, taking out key technical levels that seem to be paving the way for more losses. At the same time, equity volatility is jumping higher, with the VIX index on the S&P 500 surging the past two days to its highest levels since May. Rising equity volatility is negative for credit spreads.
Looking at the traded credit derivatives indexes - the Dow Jones CDX - investment-grade spreads gradually widened over the course of the week. Traders and strategists have said that with the average of the 125 companies' spreads trading wider than the index, more widening may be around the corner.