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Risk Rally Extends To Corporate Bonds

04/17/2012 | 05:03pm US/Eastern
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   By Patrick McGee 
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Corporate bonds are making a bit of a comeback following a weak and volatile beginning to the second quarter.

The CDX North America Investment-Grade Index, a proxy for risk sentiment in the corporate bond market, improved 3% in late trading Tuesday, while safe-haven Treasurys declined a bit, after Spain successfully sold EUR3.2 billion ($4.2 billion) of new bonds.

"There is some relief that Spain got through their debt auctions, and people are speculating there could be more help for them from the International Monetary Fund and others," said Kathy Jones, fixed-income strategist at Charles Schwab. "That eased up some of the risk-aversion from the day before."

Autozone Inc. (>> AutoZone, Inc.) brought $500 million of 10-year debt into the primary market. The triple-B rated borrower sold the bonds at 1.70 percentage points over Treasurys for a yield of 3.702%, marking a 0.05 point improvement from earlier price guidance.

Bonds issued in the last week, which trade more often than older paper, were showing modest improvement in Tuesday trading, according to MarketAxess.

Lowe's Cos. (>> Lowe's Companies, Inc.) 1.65% bonds due 2017 improved 0.04 percentage point, relative to Treasurys, to a spread of 0.72 point. Deere & Co. (>> Deere & Company) 0.875% bonds due 2015 also strengthened 0.04 point to a spread of 0.37.

That trend can lure investors into the primary market, helping companies to borrow at cheaper rates. However, new volume is expected to be subdued this month as companies focus on releasing first-quarter earnings.

Other actively traded bonds were mostly improving too, including bank debt generally perceived as riskier than industrial paper. Goldman Sachs Group (>> Goldman Sachs Group, Inc.) 2022 bonds, for instance, improved 0.11 percentage point to a spread of 3.42 points. Morgan Stanley (MS) bonds due 2017 strengthened 0.11 point to a spread of 4.09 points.

Jones said the corporate market remains in push-pull dynamic. "The U.S. economy is gaining traction, but deleveraging and the European debt situation is holding us back," she said. "Frankly, that's going to continue."

Average corporate bond yields finished Monday at 3.32%, just 0.05 point from the record low achieved in early March, according to the Barclays U.S. investment-grade index. But spreads rose to 1.88 points, versus 1.85 last week.

-By Patrick McGee, Dow Jones Newswires; 212-416-2382; patrick.mcgee@dowjones.com

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