Corporate Bonds Are Off to Strong Start to the Year

(Bloomberg) -- U.S. corporate bonds are back in vogue to start the year as dovish signals from the Federal Reserve, strong economic data and easing trade tensions entice investors to take more risk.

The spread on investment-grade debt -- which is the premium investors are paid for the additional risk above a perceived safer rate -- narrowed for a third straight day as of Tuesday after touching the widest level in more than two years on Jan. 3, according to the benchmark Bloomberg Barclays index.

That positive shift was confirmed when two BBB rated issuers added to a total of $14 billion of debt sold Tuesday after the market had seen fewer sales of mostly safer credits earlier in the week. With benchmark spreads falling from multiyear highs, lower costs are bringing borrowers back to the market. Other signs of improving demand include more orders and cheaper starting prices in deals.

“We have a much more balanced market with greater liquidity than we had over the December period, that’s quite healthy,” Mark Holman, chief executive officer at TwentyFour Asset Management, said in an interview Wednesday. “It’s still premature to call it the end, and would think this is better described as an intra-cycle dip from which markets have the chance to recover.”

After the slowest December for sales since 1995, the strong January start for investment-grade bonds may highlight a shift in investor sentiment in the wake of more dovish comments by Federal Reserve Chairman Jerome Powell, a strong U.S. jobs report Friday and signs the trade war between the U.S. and China is easing.

The market has been dogged by rising interest rates and concerns that heavily indebted corporations with BBB ratings -- it’s largest segment -- will struggle if the economy slows. A number of companies have been cut to junk, which started in November with General Electric Co., followed by Xerox Corp. in December and PG&E Corp. on Tuesday.

Certainly, it’s too early to call an end to the pain. Morgan Stanley says that more than $1 trillion of investment grade U.S. corporate bonds could be cut to junk when the credit cycle turns.

--With assistance from Natalya Doris and Kriti Gupta.

To contact the reporter on this story: Brian Smith in New York at bsmith373@bloomberg.net

To contact the editors responsible for this story: Christopher DeReza at cdereza1@bloomberg.net, Randall Jensen

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