US corporate bond spreads recover on promising economic data

US corporate bond spreads, the premium over Treasuries that companies pay for debt, are starting to recoup some lost ground after recent strong economic data increased hopes for interest rate cuts and calmed recession fears.

Investment-grade corporate bond spreads on Wednesday tightened by 3 basis points to 105 basis points (bps), according to the ICE BofA Corporate US Corporate Index.

Junk bond spreads finished Wednesday at 346 bps, also 3 bps tighter this week, according to the ICE BofA High Yield Index.

Both high-grade and junk bond spreads retraced much of early August’s dramatic widening, after surprisingly weak July jobs and productivity reports prompted concerns of a sharp economic downturn and potential recession.

Economic data this week appears to have calmed recession fears. US consumer prices in July rose at their slowest pace in nearly 3-1/2 years, while the cost of services fell by the most in nearly 1-1/2 years.

Other data this week pointed to economic growth, including July retail sales that rose more than expected.

“The primary driver of tighter credit spreads this week is the Goldilocks narrative of growth without inflation,” said Nelson Jantzen, a strategist who covers high-yield bonds, leveraged loans, and distressed leveraged credit at JPMorgan.

The data has further assured credit investors that the Federal Reserve has finished hiking interest rates and will begin cutting rates as soon as September.

Forecasts now see a 76.5% probability of a 25 bp Fed rate cut in September, according to CME’s FedWatch Tool, up from 64% on Wednesday.

“Recent data has given the market more comfort around the likelihood of more accommodative policy at the next FOMC meeting, and this has given investors increased confidence that a substantial rise in rates is less likely,” said Blair Shwedo, head of fixed-income sales and trading at US Bank.

Renewed optimism was helped by an overall lack of negative surprises in borrowers’ second-quarter earnings disclosures, market participants said.

“Financials aside, consumer discretionary and industrial companies were among the next strongest performers during Q2 earnings season, likely providing some support for services and basic material sectors during the widening” of credit spreads in early August, said Dan Krieter, director of fixed income strategy at BMO Capital Markets

Almost USD 25 billion in new high-grade debt has sold this week, versus forecasts of a weekly total of USD 30 billion heading into the week, said Krieter.

Junk debt issuance has also recovered this week following its lightest showing of 2024 last week, albeit at a slower pace than high-grade deals, said Jantzen.

(Reporting by Matt Tracy; Editing by Leslie Adler)