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Signs appear of a tightening in corporate credit markets Print E-mail
Wednesday, 13 January 2010

By Marine Cole

The pull-back in the corporate bond market may be happening earlier than expected.

Following a disappointing start to the earnings season with Alcoa's worse-than-expected results, corporate bond spreads and credit default swaps widened Tuesday, showing investors are getting a little more skittish after months of easing in credit markets.

It's unlikely the credit environment will return to levels seen a year ago after Lehman Brothers collapsed. For instance, Fitch Ratings announced today that the year-end seasonal decline in global CDS liquidity was far less pronounced this year than in previous years, suggesting signs of recovery in the credit markets.

Investors are also still willing to lend money in bulk. U.S. corporate bond yields ended Tuesday at 5.47 percent on average, the lowest since February 2005, according to Bloomberg.

Nevertheless, financial executives will soon face higher costs of debt as still shaky economic fundamentals may not yet fully support the strong rally seen in bond markets. For instance, prices of $2 billion of bonds sold Tuesday by Carl Icahn fell 1.275 cents below the issue price to 98 cents on the dollar. And the Markit CDX North America Investment-Grade Index, which tracks CDS of 125 companies, jumped 2.75 basis points to a mid-price of 78.25 basis points, according to Barclays Capital. The index rose a day after it fell to 75.75 basis points, its lowest level since Dec. 14, 2007.

"A lot of companies are worried about a drying up of liquidity and a drying up of funding, whether it comes from banks or the public markets," Burt White, chief investment officer at LPL Financial, told Bloomberg. "With deals being oversubscribed right now, with that demand, why risk putting it off? I think a lot of companies thought that while the market is hot, you might as well strike."

And the longer financial executives wait, the more expensive debt will become if earnings results continue to be sluggish.

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