- The corporate bond market saw a small pullback lately as spreads rose and sales declined.
- Overall, movements in the corporate bond market seem to reflect short-term jitters rather than companies' prospects, which are proving robust.
- After such a large surge last year, it's not surprising investors may take a breather to assess where to go from here. That doesn't necessarily buck the upward trend.
As a slew of government debt fears brew globally, many worry (needlessly, in our view) we're at the point of boiling over. Debt woes aren't trivial for individual nations, but even in the best of times there are always trouble spots—this cycle should be no different. But perhaps these debt jitters are why the corporate bond market saw a small pullback lately.
Corporate bond returns rebounded spectacularly last year, rising 16.3%, but returns are now slowing. Spreads (the difference between corporate bond yields versus relatively risk-free government yields) recently rose at their fastest pace in more than two months, with junk bond spreads increasing 13 basis points. And the higher borrowing costs are making companies think twice about issuing debt—bond sales fell 7% from December to January and 24% from a year earlier. Some extrapolate the rise in the yields spread to receding investor optimism in the global economic recovery, underscored by government debt problems globally and high unemployment domestically.
But before investors assign too much weight to recent corporate bond market events, it's important to note corporate bonds' absolute yields are still near four-year lows. Big firms can still borrow relatively cheaply. Though bond sales from India to Korea to Brazil were canceled last week, there were plenty of big offerings that were successful (and some that were oversubscribed). Further, non-bank companies are incredibly cash-rich—historically so—and are in a healthy enough position to choose to delay bond offerings to take advantage of a more profitable environment—if they so wish.
Overall, movements in the corporate bond market seem to reflect short-term jitters rather than companies' prospects, which are proving robust. S&P 500 companies' reported earnings thus far have greatly surpassed expectations—of the 314 companies reported, 74% beat analyst expectations and earnings are expected to increase 206% from the prior year. (You read that correctly—206%.) This year, firms can continue to look forward to business activity picking up as extremely lean inventories are replenished.
Note, the widening spreads are taking place during the same period debt fears are striking stocks. These shudders are likely more tied to sentiment than true fundamentals (remember, Greece's GDP is just 0.6% of the global economy, and Ireland's and Portugal's are even smaller). After such a large corporate bond and stock surge last year, it's not surprising investors may take a breather to assess where to go from here. As debt and other fears prove to have a lukewarm rather than melting impact on the global recovery, where to go from here could very well be upward.