US credit spreads tightened on Friday, extending gains from the previous session as optimism about economic recovery efforts improved investors' appetite for risk. The cost of insuring corporate debt with credit default swaps fell sharply, with the main index of investment-grade credit default swaps tightening to 187 basis points from about 198 basis points on Thursday, according to data from Markit Intraday.
In one sign of improved risk appetite, this week's new issues included several lower-rated bond issues that drew strong demand with attractive yields. "People are reaching for yield and feel more comfortable doing so," said Rich Lee, head of fixed-income at New York broker-dealer Wall Street Access. "The moves that the Treasury and Fed are making are definitely freeing up capital."
Moves by the Federal Reserve and Treasury to thaw the worst credit crunch in generations have helped corporate bond spreads tighten by 74 basis points from their record wide of 656 basis points in early December, according to data from Merrill Lynch.
For the week, spreads are on pace for their best performance since late January, having narrowed by 14 basis points through Thursday, according to Merrill Lynch. The spread tightening gained momentum on Thursday after the Group of 20 leaders from the largest developed and emerging economies clinched a $1.1 trillion deal to combat the global economic crisis.
"It is not a feeding frenzy, it is very subdued, but it's definitely better in spread land," said Lee. As new deals hit the secondary market, "there's huge, huge tightening going on," he said.
A $655 million issue of five-year notes priced on Tuesday by Ingersoll-Rand at 783.8 basis points more than Treasuries has tightened to 698 basis points, according to MarketAxess. Energy Transfer Partners' five-year notes, priced on Thursday at 674.7 basis points over Treasuries, have tightened by about 50 basis points.
Spreads also tightened on Pfizer's debt after the drugmaker said it has advanced two more drugs into late-stage patient studies. Pfizer's 4.45 percent notes due in 2012 tightened by 37 basis points to 125 basis points over Treasuries, according to MarketAxess.