European corporate bonds edged higher on Monday, pushing spreads to near record lows, as many investors sat on the sidelines while the United States celebrated the Labour Day public holiday.
The cost of credit protection on Swedish telecom equipment maker Ericsson fell after Fitch raised its credit rating by two notches.
The FTSE Euro Corporate Bond Index showed investment-grade corporate bonds in euros yielding an average 46.6 basis points more than similarly dated government bonds at 1451 GMT, 0.1 basis point more on the day.
"We are one or two basis points tighter across the board with cash outperforming credit default swaps for once," said one trader. "There is a massive technical bid to the market because so many investors have found themselves short."
Many bond investors sold corporate bonds in the past six months believing that an 18-month rally must soon end. However, as spreads ground tighter many of those players have looked to take on more risk, driving yields ever lower.
The rally has been fuelled by low supply and a boom in the CDO (collateralised debt obligations) market. A CDO is a basket of debt designed to disperse individual credit risk.
In synthetic CDO deals, investors sell credit default swaps (CDS) to the banks arranging the CDOs, lowering the cost of insuring against default. In turn, the banks buy cash bonds to balance their books.
General Motors 8.375 bond due in June 2033, a benchmark for the market, was trading about two basis points tighter at 1430 GMT at 270 basis points over Bunds.
The cost of credit protection for Ericsson fell after it had its senior unsecured rating raised two notches to BB+ by Fitch Ratings which cited a significant improvement in Ericsson's financial profile.
Five-year credit default swaps on the company were trading at around 95 basis points, five basis points lower on the day and compared with 125 basis points 10 days ago.
"There are only sellers (of credit protection), not buyers out there so the price keeps falling," said one trader. "It's absolutely incredible."
The new rating is the highest in the non-investment grade category. Fitch also revised Ericsson's outlook to positive from stable.
In the primary market, order books for Kreditanstalf fuer Wiederaufbau's (KfW) last major euro-denominated bond this year will open on Tuesday morning London time and pricing should be no later than Thursday afternoon, a syndicate source said.
KfW plans to sell a 5.0 billion euro benchmark bond maturing on November 15, 2007, lead managers BNP Paribas, Goldman Sachs and Nomura said earlier.
KfW is rated a top-notch triple-A by Moody's Investors Service, Standard and Poor's and Fitch Ratings, and carries a guarantee from the Federal Republic of Germany.