US credit spreads finished the week little changed as confidence about improving corporate credit quality and strong demand for debt offset concerns over the impact mortgage buybacks and foreclosures will have on banks. The benchmark US investment grade credit derivative index traded around 97 basis points, according to Markit Intraday after gapping out past 100 basis points earlier in the week.
The move higher came on concerns about capital charges banks will take from bad mortgages and shoddy foreclosure procedures. Improving credit metrics of most US companies and steady inflows into bond funds have helped support credit spreads, J.P. Morgan analysts said on Friday in a report.
Companies have generally been growing earnings faster than their debt, and leverage of investment grade companies, a measure of debt relative to earnings, has dropped to an average 1.9 times last quarter from 2.1 times in the fourth quarter of last year, J.P. Morgan said.
Free cash flow generation also reached a record high in the second quarter, which has allowed companies to increase dividends and share buybacks at the same time as reducing their leverage, the analysts said. Momentive Performance Materials and Hexion US Finance were among high yield issuers coming to market on Friday, announcing deals of $840 million and $440 million in 10-year, second-lien notes, respectively said IFR, a Thomson Reuters service. The investment grade market was quiet after more than $15 billion of high grade debt was issued this week. This brings the month-to-date total to almost $39 billion, according to IFR/Thomson Reuters data.