Concerns that the Obama administration proposals to deter banks from excessive risk-taking might curb lending and crimp economic growth. Stronger-than-anticipated US business activity and consumer sentiment data briefly lifted corporate bond prices along with stocks early on Friday, but investors soon returned to mulling risks to corporate bonds and took some profits.
"Any move that we saw early on this morning faded with the overhanging uncertainty of taxes or government regulatory issues that are going to be placed on the financial system," said Sean Simko, fixed-income portfolio manager with investment management company SEI in Oaks, Pennsylvania. Bonds of financial institutions "are still taking the brunt of the pain," and prices have slipped over the past week, said Simko.
In turn, if bank lending were to remain constrained, companies dependent on this financing would come under pressure and their bonds might also sell off, analysts warn.
Although credit conditions have eased substantially in the past year for many companies wishing to borrow in the corporate bond market, "for other corporate borrowers that remain disproportionately dependent on bank financing, the future is cloudier, given banks' continued predisposition to shrink loan books," Diane Vazza, head of global fixed income research with Standard & Poor's in New York, wrote in a report on Friday. But industrial companies' bonds have generally held steady over the past week, helped by some signs of a firming economy, Simko said.
Costs to insure corporate bonds edged slightly wider. The main index of US investment grade corporate bond credit default swaps widened by about 1 basis point to 97 basis points. Following a meteoric rally last year as investors in corporate bonds regained their appetite for riskier assets, yield spreads over Treasuries stopped narrowing in the past month and have widened slightly over the past two weeks.
US investment-grade corporate bond yield spreads over Treasuries had widened to 183 basis points through Thursday, from 176 basis points on January 14, according to Bank of America Merrill Lynch data. When yield spreads widen investors are demanding a higher premium for the additional risk of holding corporate bonds as opposed to government debt. "The market is still fragile, whether it is on concerns around sovereign debt, financial regulatory worries or earnings," Simko said.