Corporate Bonds Decline as Investors Anticipate Fed Action

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By Maulik Mody

Corporate bonds retreated slightly after three straight weeks of gains as high unemployment and cooling inflation convinced investors that the Fed will announce another round of securities purchases in their next meeting. Spreads widened for both the short and the long index, which track bonds less than 5 years and greater than 5 years to maturity respectively.

The short iTB index slipped 0.3% to 1092.03 during the week ended Oct 15. Corporate bonds in this spectrum could not keep up with Treasuries as investors speculated that the Fed will add short termed Treasuries to its balance sheet, hence widening spreads. The average yield increased 7 bp to 2.20% and the average spread to Treasuries widened 2 bp to 1.59%.

The leading bond in this index for a second week was Genworth Financial’s 5.75% issue due 2014. The bond gained $0.61 in price and now trades at 106.50 as its yield pushed 18 bp lower to 3.83. The spread on the bond tightened 24 b to 3.07%. The company’s stock rallied more than 2% as it announced change in two of its key leadership positions.

The longer counterpart fell considerably as investors sold off bonds in the far end of the spectrum. The index shed its gains from the previous week and declined 1.6% to 1153.50 as all bonds in the index fell in price. The average yield increased 23 bp to 3.88%. Average spreads to maturity widened 6 bp to 1.64% as corporate sold off more than Treasuries.

Although all bonds of the index fell in price, the best performer of the week, judged by the bond whose spread tightened the most, was Wal-Mart’s 5.25% issue due in 2035. The yield on the bond climbed 18 bp to 4.98%, while spread tightened 6 bp to 1.21%.

Disclosure: None