LIVE MARKETS-Corporate credit spreads reach record tights on strong economy

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CORPORATE CREDIT SPREADS REACH RECORD TIGHTS ON STRONG ECONOMY

U.S. dollar denominated investment grade corporate credit spreads reached a record tight level on Friday on an improving U.S. economic outlook and strong demand for the debt.

JPMorgan’s US Liquid Index (JULI) reached 83 basis points on Friday, with BBB-rated credits 3.2 basis points tighter while A-rated bonds tightened by 1.9 basis points on the week, JPMorgan analysts led by Eric Beinstein said in a report.

“Spread compression by rating tends to occur when investors become more optimistic on economic growth and this is logical as recent growth indicators have been stronger than expected,” the analysts said.

JPMorgan notes that last week retail sales, industrial production and weekly jobless claims were all better than economists had forecast. The Atlanta Federal Reserve’s GDPNow estimate has also been above 3% for third quarter growth, which if it bears out would be “a significant upshift” compared to the 2.0% and 2.1% growth in the first and second quarters.

A weaker labor market is the economic outlier. “Still it is difficult to see what is going to drive yields even lower near term and demand has remained robust despite the move lower in yields over the past month,” the analysts said.

Fund flow data points to weakening demand in high grade corporate bonds while supply surges, however these factors have not impacted credit spreads. Supply has increased as companies take advantage of record tight spreads and falling yields.

Dealers holdings of investment grade corporate debt remain near record lows and new issues continue to outperform bonds in the secondary market. This is “further evidence of continued strong technicals,” JPMorgan said.

(Karen Brettell)

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