US corporate bond spreads narrow on positive outlook

High-grade spreads narrowed and junk bonds gained in the US corporate bond market on Friday on optimism that economic growth and corporate profits will remain solid for the foreseeable future. "The economy is resilient, which sets the stage for a solid trajectory for corporate cash flow," said Anthony Crescenzi, chief bond strategist at Miller Tabak & Co in New York.
Yield premiums have been trending lower since peaking so far this year in mid-May on fears surrounding General Motors Corp getting cut to junk and about the ailing auto industry in general.
Crescenzi said those fears, including potential fallout from hedge funds, have mostly worked their way out of the market. He predicted spreads may tighten more but not return to their tightest levels of the year because recent events have reminded investors of risk.
Most auto bonds gained on Friday after a senior United Auto Workers official on Thursday said the union was willing to discuss ways to cut healthcare costs at ailing GM and its more-troubled former parts unit Delphi Corp Both companies are under the same UAW contract.
Auto bonds in general gained because it is an early sign the union may give auto companies more flexibility to cut costs in the future, said John Kollar, fixed-income analyst at HSBC Securities in New York.
"The market was so negative for so long on the autos, now is grasping for things to be positive about," Kollar said.
GM shares gained much more on the news than its bonds. GM bonds have been gaining in recent weeks, which is why their reaction was more muted, Kollar said.
GM bonds due 2033 with a 8.375 percent coupon were the auto giant's most active issue on Friday, rising to 83.19 cents on the dollar to yield 10.2 percent from 81.5 cents the prior session, according to MarketAxess.
Ford Motor Co posted modest gains, while most auto parts suppliers' bonds also gained.
Across the broader market, spreads were helped by weakness in Treasuries, which pushed benchmark yields up and helped pull spreads modestly tighter, a trader said.
US Treasury debt prices retreated on Friday as investors concluded that the Federal Reserve would not stop raising interest rates soon. In late trading, 10-year notes were quoted down 25/32 yielding 4.05 percent.