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US CORP BONDS-Spreads steady with Greece in focus
Reuters News, 18 February 2010

U.S. corporate bond spreads were little changed on Thursday as investors awaited more news on the Greek debt crisis and for clues on how the country's next bond issue would fare.

After corporate bonds' meteoric rally in 2009 back from the depths of the financial crisis, over the past month yield spreads over Treasuries have widened on the view that the economy may not grow strongly enough to stoke more gains.

When yield spreads widen over government bonds that shows investors are demanding higher compensation for the additional risk of holding corporate debt.

Global investors' growing concern about high debt levels in Greece, Portugal and Spain has also diminished appetite for corporate debt and other riskier assets globally, analysts say.

News that Greece is planning a debt issue was neutral for the corporate bond market on Thursday as investors awaited more details of that proposed debt sale, said David James, vice president of fixed income and desk analyst at broker-dealer Wall Street Access in New York.

In the United States, there has been a dearth of issuance so far this week, while traders say volumes have been light.

The cost of insuring U.S. corporate debt with credit default swaps edged lower. The main index of investment-grade credit default swaps narrowed by about 2 basis points to 93 basis points, according to data from Markit Intraday.

But corporate bonds and other riskier asset markets may remain jittery for some time about how Greece and some other European governments will address their debt problems, analysts said.

Sovereign debt concerns and uncertainty about how strong the U.S. economic recovery may prove to be have bruised lower-quality high-yield bonds which have posted a loss of about 1.9 percent over the past month, according to Bank of AmericaMerrill Lynch data.

"The high-yield market has been less confident about a recovery and more cautious about potential risk," said Lawrence Glazer, managing partner of Mayflower Advisors in Boston.

By contrast, investors view higher-quality, investment-grade bonds as a safer haven, Glazer said.
Investment-grade bonds have had a more modest sell-off of about 0.9 percent over the past month because investors are more confident these can withstand a deteriorating economy, analysts say.

However, many fund managers remain concerned that shorter-maturity investment-grade corporate bonds are in danger of a sell-off should harbingers of inflation spur the Federal Reserve to start raising U.S. interest rates later this year.

Shorter-maturity notes are especially sensitive to central bank rate hikes.

"People have rushed to shorter-term corporates," said Mark Bonhard, a senior wealth manager in Cleveland Ohio with Rehmann Financial, a financial services company. "The short end of the market is overpriced," he said.

Trillions of dollars of U.S. government debt issuance to pay for economic and financial rescues will ultimately stoke inflation, and that's the bond market's biggest longer-term worry, Bonhard said.

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