US corporate bond spreads held steady on Friday at the narrowest levels since May, as investors shrugged off a weak jobs report and continued seeking higher-yielding assets. A surprise loss of jobs in September's nonfarm payrolls report reinforced bond investors' expectations that the Federal Reserve will soon announce an expansion of its quantitative easing measures to spur economic growth.
More purchases of Treasuries would likely drive government bond yields, some of which are already hitting record lows, to new troughs. That would further burnish the allure of somewhat higher-yielding corporate bonds, some analysts say.
The US economy shed jobs in September for a fourth straight month. "To me this was all about a referendum for QE2. Was there anything in this report that would possibly give the Fed pause? It doesn't appear that way," said Kevin Flanagan, chief fixed- income strategist with Morgan Stanley Smith Barney in Purchase, New York. "The Treasury market is rallying because this report continues to suggest odds favour the Fed does announce QE2 at the November meeting," Flanagan said. "For corporates that is probably a positive development," he added.
Provided that the economy continues to grow, albeit feebly, investors are favouring bonds of companies that have bolstered their balance sheets and accumulated cash since the global financial crisis. But fund managers are becoming increasingly cautious about which credits they choose. Many are focusing on utilities, consumer staples makers and other companies that could weather a period of anaemic growth.
Marilyn Cohen, president and chief executive of Envision Capital Management, a fixed-income money management firm in Los Angeles, said she is avoiding longer maturity bonds that could later be hit if inflation returns. Cohen, who is sticking to corporate bonds that mature before 2018, has purchased some of the lowest-rated investment grade credits, seeking slightly higher yields for her retail investor clients.
Among credits Cohen has bought are department store Macy's and mailing services company Pitney Bowes, she said. The low yields such credits now have show that "all of the low hanging fruit has been picked," Cohen said, as corporate bond yields have fallen in the market's long-running rally this year and last following the credit crisis.
For instance, Pitney Bowes Inc's 5.000 percent notes due in 2015 were yielding 2.78 percent on Friday, according to MarketAxess. "Three percent is the new five percent," Cohen said. US investment grade corporate bonds yield spreads over Treasuries have narrowed by about 3 basis points in the past week to 181 basis points, the tightest since May, according to Bank of America Merrill Lynch indexes.
The costs to protect corporate bonds with credit default swaps were little moved. The main index of US investment grade credit default swaps was little changed, at 98 basis points, according to Markit Intraday.