US corporate bond spreads widened on Friday in thin trade, after a weaker-than-expected jobs report raised questions about the strength of the economy.
The move brings spreads a bit wider for the week, after poor sales from major automakers and retailers and signs of a weak job market have made investors wonder how long profit growth will continue at its current pace.
"You have to keep your eye on the fundamentals now," said Thomas Urano, portfolio manager at Sage Advisory Services in Austin, Texas, who helps manage about $1 billion in corporate bonds.
However, signs of further weakness are not likely to result in significant spread widening in the coming weeks. That's partly because weaker data increases the likelihood that the Federal Reserve will raise rates at a slower pace, a development that bodes well for corporate borrowing costs.
Also, light supply should prevent spreads from widening dramatically, Urano said. Stocks fell and corporate bond spreads widened in a holiday-shortened session on Friday after the Labour Department said only 112,000 jobs were created last month, less than half the number expected. Ford Motor Credit Co's 7 percent notes due 2013 widened 0.03 percentage points to 2.3 percentage points, according to MarketAxess. Ford Credit is the financing arm of Ford Motor Co.
Friday's jobs report came a day after Ford and General Motors Corp posted double-digit declines in their US vehicle sales in June, dragging industry sales to their lowest in nearly six years. On Wednesday, Wal-Mart Stores Inc, the largest retailer in the United States, and Target Corp warned that June sales would be weaker than expected.
Weak sales reports helped investment-grade corporate bond spreads in recent sessions to move to their widest levels in about a month, averaging about 0.97 percentage points as over Thursday, compared with 0.95 percentage points at the beginning of the week, according to Merrill Lynch indexes.
Nortel Networks bonds were unchanged after a report in the Wall Street Journal sent the company's shares down by about 10 percent in Toronto, but the bonds were unchanged because the company is believed to have ample funds pay its debt maturing over the next few years, a trader said.
The Wall Street Journal said the telecom equipment supplier manipulated its books to allow the company to show a profit in 2003.
Nortel Networks Ltd's 6-1/8 percent notes of 2006 were unchanged at around 101 cents on the dollar.
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