US CORP BONDS-Spreads tighten on robust bank earnings
Reuters, 14 April 2010
U.S. corporate debt spreads tightened on Wednesday as strong earnings from JPMorgan Chase raised hopes of similar results from other big banks, boosting financial institutions' bonds, traders said.
While overall U.S. investment grade corporate bond prices hit their nadir in December 2008, financial entities' bonds didn't bottom until about a year ago, as the financial system struggled to recover after nearly collapsing in the credit crisis. A turning point came with the apparently benign results of government "stress tests" for banks in spring 2009.
Since last year, banks' trading revenues have rebounded as credit markets thawed, investors have recovered their appetite for riskier assets and companies and the government have sold huge amounts of debt.
JPMorgan's financial results offered more evidence of gains in investment banking and slowing loan losses, hinting at improvements in the economy.
The bank's earnings signaled that "financials are doing well and that trading activity is really robust," said James Cox, managing partner at financial planning and asset management company Harris Financial Group in Colonial Heights, Virginia.
"I believe the rest of the data we will see from financials will mirror JPMorgan and tell us that the default rate is way overstated," he said.
As the U.S. economy has returned to growth, the default rate for junk bonds has begun to drop.
Moody's Investors Service said earlier this month it expects the U.S. junk bond default rate to fall to 3.1 percent by the end of the year from 10.9 percent in March.
Corporate earnings helped firm the market's tone on Wednesday, driving some financial institutions' bond spreads more than 5 basis points tighter and some industrial companies spreads about 2 basis points tighter, said Richard Lee, head of fixed-income at broker-dealer Wall Street Access in New York.
Economic optimism eclipsed, for now, investors' concerns about debt-burdened sovereign bonds, even though market confidence in the latest aid package for Greece seemed to be slipping and Greek government bonds sold off on Wednesday, said Andrew Brenner, head of emerging markets sales and trading at Guggenheim Securities in New York.
"Today, the bullish spin on financials is overwhelming the negativity on Greece," Brenner wrote in an email note.
For instance, the spread of Citigroup's 8.500 percent notes due in 2019 tightened to about 191 basis points over Treasuries from 209 basis points late on Tuesday, according to MarketAxess.
Nevertheless, bond traders and analysts continue to cite reasons for caution.
Many new deals are being priced with little or no yield concessions, making some fund managers reluctant to buy them.
"Even though there is a ton of issuance, I don't feel there is a ton of value for us there near term," said Cox.
Strong demand from investors shifting out of money market funds that yield close to zero has helped narrow investment grade corporate spreads to just 155 basis points over Treasuries, the tightest since November 2007, according to Bank of AmericaMerrill Lynch indexes.
"Spreads are getting a bit ridiculous and there is a hesitance to buy the 30-year sector," said Lee, because of the worry that yields may rise as the economy gathers momentum.