US corporate bond spreads were mostly unchanged on Friday and activity was very light as trading desks remained thinly staffed after Thursday's Thanksgiving holiday.
With a pre-Thanksgiving surge in issuance now absorbed, the next test for the market will come next month, when companies begin a rush to issue before year-end, Brian Reynolds, chief market strategist at M.S. Howells & Co, said in a report issued on Friday.
For now, spreads are settling back into a range-bound pattern after widening last week on mounting troubles in the auto sector and a spate of shareholder-friendly activities.
The widening has made corporate bonds look more fairly valued, setting them up for better performance over the short term, Banc of America Securities credit strategist Jeffrey Rosenberg said in a recent report.
Rising interest rates, a flatter yield curve and corporate policies that favour equity holders over bondholders could threaten the longer-term outlook for corporate bonds, Rosenberg said. "However, in the short-term view, some of those risks appear to be diminishing," he said.
Minutes from the Federal Reserve's November policy-setting meeting released this week reduced expectations for future Fed rate hikes, a change that should support both the equity market and credit spreads, he said.
The minutes showed that Fed members discussed how to lay the groundwork for bringing to an end a year-and-a-half cycle of rate increases, and some members cautioned of the risk of tightening too far.
Thursday's holiday and early closes on Wednesday and Friday also put a damper on the junk bond market, where trading was nearly at a standstill and prices unchanged.
The junk bond market is expecting a heavier calendar of issuance than usual for December, though recent strength in equities and Treasuries is improving sentiment and may help the market deal with the supply, a trader said.
About a dozen junk bond deals had to be pulled over the past two months because of tepid demand.
Junk bond mutual funds have reported net outflows for eleven straight weeks, including $250 million in the week ended Tuesday, according to AMG Data Services. Net outflows have totalled about $11 billion year-to-date, which is a record.
In other markets, Treasury prices rose, playing catch-up with euro zone debt prices, which rallied on Thursday when the US markets were closed for Thanksgiving.
Benchmark 10-year Treasuries were up 11/32 to yield 4.43 percent in early afternoon trading.