US corporate bond spreads narrowed on Friday for the first day in four after the Federal Reserve cut the discount rate in a surprise move, bolstering liquidity in the market. The reduction, which did not include a move on the benchmark interbank lending rate, the federal funds rate, took the discount rate to 5.75 percent from 6.25 percent.
High-grade spreads narrowed by 5 to 10 basis points, while high-yield spreads tightened by 15 to 20 basis points before widening back a few basis points in afternoon trades, traders said.
"Effectively the message is they are wide awake and reading the newspaper," said Jason Brady, who oversees about $1 billion in fixed-income assets at Thornburg Investment Management in Santa Fe, New Mexico. "This is very welcome by the market. When you have a funding crisis, and you have banks unwilling to lend to each other, the Fed's move today is a very direct fix."
High-grade bond spreads had widened out every day since Monday to about 144 basis points, while junk spreads increased to about 459 basis points through Thursday, according to Merrill Lynch. Countrywide Financial Corp drew down on a $11.5 billion bank credit line on Thursday, resulting in credit rating downgrades and further spread widening. Countrywide's 3.25 percent notes due in 2008 rose less than a cent on the dollar on Friday to about 92 cents, according to MarketAxess.
The cost to insure debt of Countrywide's home loan unit with credit default swaps fell 77 basis points to end at 490 basis points, or $490,000 per year for five years to insure $10 million in debt, according to GFI Group. Among new sales, Wal-Mart Stores on Friday sold $2.75 billion debt in two parts, said a market source familiar with the transaction.
The sale included $500 million of notes due February 15, 2018, priced to yield 1.15 percentage points over US Treasuries and $2.25 billion of 30-year bonds yielding 1.50 percentage points over Treasuries. Traders said the sale was oversubscribed and saw good demand. The joint lead managers on the sale were Banc of America Securities, Citigroup Global Markets, Credit Suisse and Goldman Sachs, said the source.