Blue-chip debt coming up aces as recovery stalls

Investment-grade U.S. corporate bonds are attracting investors betting a struggling labor market will help contain inflation after yields rose above 4 percent for the first time since early August. Yields on debt of borrowers from Bentonville, Arkansas- based retailer Wal-Mart Stores Inc. to computer software maker Oracle Corp. in Redwood City, California, have risen from an average of 3.53 percent on Nov. 4, the lowest on record, as gains in manufacturing and retail sales data pointed to an improving economy, according to a Bank of America Merrill Lynch index that tracks more than 4,400 bonds. U.S. unemployment, which rose in November to the highest since April, may take five years to fall to a normal level, while it's possible the Federal Reserve will buy more than the $600 billion of Treasuries announced last month, Chairman Ben S. Bernanke said in an interview broadcast yesterday. Rising demand caused yields on company bonds to tighten relative to government debt in the final three days of last week from the widest since Oct. 21. “The softer economic news actually put a bid in on fixed-income prices,” said Mark Luschini, chief investment strategist at Philadelphia-based Janney Montgomery Scott LLC, which has $50 billion of assets under management. “Bonds love the prospects of weakened economic data.” Spreads Shrink The extra yield investors demand to own investment-grade corporate bonds rather than Treasuries shrank to 179 basis points, or 1.79 percentage points, as of Dec. 3 from 182 at the end of November as the U.S. reported that the unemployment rate jumped to 9.8 percent, Bank of America Merrill Lynch index data show. The increase in joblessness led to speculation that consumers will temper spending, keeping inflation from accelerating and eroding the fixed-income payments of bonds. “Investment-grade credit does look attractive here,” said Nicholas Finkelman, who helps oversee $3.5 billion of bonds as a money manager at New York-based Ryan Labs Inc., which last week bought debt issued by American International Group Inc. Yields ahead European efforts to tackle deficits will also help prevent inflation, helping to support prices from here, according to William Dennehy, senior fixed-income money manager at Chicago- based Northern Trust Corp., which has $150 billion in assets under management. “We like investment-grade credit at these yields,” Dennehy said, adding Northern Trust was buying newly issued bonds last week. Fed policy makers on Nov. 12 started a second round of asset purchases to support growth in the economy, reduce unemployment and avert deflation. The Fed has kept its benchmark rate in a range of zero to 0.25 percent for two years. The Labor Department reported Dec. 3 that the economy added 39,000 jobs in November, fewer than the most pessimistic projection of 87 economists surveyed by Bloomberg News. The median forecast in the survey was for 150,000 more jobs. Bernanke Interview “At the rate we're going, it could be four, five years before we are back to a more normal unemployment rate” of about 5 percent to 6 percent, Bernanke told CBS Corp.'s “60 Minutes” program. The purchase of more bonds than planned is “certainly possible,” said Bernanke, 56. “It depends on the efficacy of the program” and the outlook for inflation and the economy. Corporate earnings are headed for their best annual performance since 1988, with analysts forecasting 37 percent growth this year. They estimate next year will see a 14 percent increase, according to projections compiled by Bloomberg News. Company bonds should outperform government debt in 2011 as relative yields remain compelling, net sales decline and the securities benefit from the Fed's quantitative easing, Barclays Capital analysts led by Eric Miller wrote in a Dec. 3 report. Spreads Remain Wider Spreads on high-grade corporate bonds remain wider than the average of about 92 basis points in 2007 before credit markets began to seize up. Returns on U.S. investment-grade debt will beat government bonds by 250 basis points next year, the analysts wrote. Investment-grade bonds have returned 9.52 percent this year, while Treasuries have gained 6.88 percent, Bank of America Merrill Lynch index data show. The net amount of corporate bonds issued is forecast to plummet 30 percent as $285 billion of debt, excluding that from U.S. banks, is redeemed, the Barclays analysts said. “The amount of fixed-income assets available to be purchased next year is going to be smaller,” said Jeffrey Meli, co-head of U.S. credit strategy at Barclays Capital in New York. “This will be one of the most significant drivers of spread performance for investment-grade next year. There's going to be less paper to buy.” --Bloomberg News