US credit spreads tightened on Friday after the Labour Department said the economy shed far fewer jobs than forecast last month, raising hopes the recovery is gaining traction. The cost of protecting corporate debt with credit default swaps fell, with the main index of investment-grade credit default swaps tightening to 99.5 basis points from 101.2 basis points at Thursday's close, according to Markit Intraday.
US employers cut 11,000 jobs in November, the smallest decline since the start of the recession in December 2007, while the jobless rate dipped to 10 percent from 10.2 percent in October. "It was a good number for the market, it certainly improved spreads, I guess about five to 10 basis points," said Joe Calvo, head of credit trading at R.W. Pressprich & Co in New York.
"There has been so much money on the sidelines, anything that can make investors more comfortable in the way of a better economic outlook pours more money into the market basically, and that's what we're seeing," Calvo said. New issues have been easily absorbed, another sign that the tone in the market is positive, he said.
Credit spreads have tightened for the past three sessions, reversing a bout of widening last week as investors' concerns receded about a debt crisis at government-owned Dubai World. After posting one of their strongest years on record, corporate bonds are likely to offer historically strong returns again in 2010, though they will be lower than in 2009, Barclays Capital said in its global credit outlook on Friday.
"We forecast 400 to 500 basis points of excess returns for the US Credit Index in 2010," Barclays said in a report. "While this is far less than the record 1,823 basis points excess returns year to date, it still would rank among the best years for credit." Excess returns refer to investment returns above those on US Treasuries.
Barclays said it expects US high-yield bonds to generate 7 percent to 8 percent total returns in 2010, following a 53.2 percent year-to-date return in 2009. "As investors hunt for yield, we believe that the credit markets should benefit form the lack of spread in alternative products, as well as a significant decline in net credit supply in the US," Barclays said.
Investors should continue to favour a heavy allocation to credit, especially as yields on risk-free assets remain close to zero, Barclays said. Dan Fuss, manager of the Loomis Sayles Bond Fund, said his guess is that corporate bonds will outperform stocks again 2010, as well as US Treasuries. "If those were your three options, I'd be inclined to go toward corporate bonds," Fuss said in an interview with Reuters Insider on Thursday.