US corporate bond spreads tightened on Thursday after robust economic data bolstered sentiment, but the market's underlying tone remained cautious ahead of Friday's much-anticipated monthly jobs report. The strongest manufacturing data in more than five years hinted firms may be on the brink of hiring to ramp up productivity, analysts said. The latest jobless claims data showed a declining trend still intact.
"The economic data has been relatively supportive of spreads continuing to grind tighter in the market," a trend that may continue for two or three months, said Scott MacDonald, head of research at Aladdin Capital in Stamford, Connecticut. Helping the market are the large amounts of cash US companies have on their books. there may also be improvements in earnings and the level of investor anxiety surrounding Greece and other heavily indebted sovereign debt markets has abated, for now, MacDonald said.
Costs to insure corporate bonds against the risk of default edged lower. The main index of US credit default swaps declined by about one basis point to 87 basis points, according to Markit Intraday. Issuance continues at a brisk pace as risk appetite recovers and investors seek higher-yielding assets. US junk bond sales hit a record pace in the first quarter as companies took advantage of low borrowing costs and smooth flowing markets to issue new debt for expansion or refinance debt at lower rates.
US first-quarter junk bond sales soared to a record $61 billion, up from $11 billion in the same period a year ago, according to Thomson Reuters data. Demand remains strong enough to tighten yield spreads of corporate bonds over Treasuries. That shows investors demanding less of a premium for the extra risk of holding company debt, even after a strong corporate bond rally in 2009.
Corporate spreads over Treasuries have narrowed dramatically since the height of the financial market panic in December 2008. At that time investment grade spreads hit record wides at 656 basis points. That spread had narrowed to 161 basis points as of Wednesday, according to Bank of America Merrill Lynch data.
However financial markets get a wild card on Friday: the government's closely watched employment report for March. The data is expected to show nonfarm payrolls grew only for the second time since the recession started in December 2007. The median forecast of economists polled by Reuters is for a gain of 190,000 jobs in March, after a loss of 36,000 jobs in February.
"I have to think a positive number; a good number that's consensus or better allows that trend (of narrowing yield spreads) to continue for a little bit longer," said Jay Mueller, senior portfolio manager with Wells Capital Management, in Milwaukee, Wisconsin.
However, any underlying trend toward improvement in the labour market is modest at best, he said. If the economic recovery falters and corporate earnings suffer, corporate bond prices may too, analysts warn.
"Tomorrow's payrolls number is highly unpredictable," Mueller said. "The census is a big potential distortion. February payrolls were held back by some bad weather. You could have a plus 200,000 number without really having accomplished much."