Bond Rally Teeters As Yield Spreads Blow Out, Interest Rates Set To Rise

Posted By on April 29, 2010

By Bryan Keogh and Sonja Cheung

April 29 (Bloomberg) — The record rally in corporate bonds is showing signs of cracking, with yields rising the most in 13 months relative to government debt and new sales falling to the least this year.

The extra interest investors demand to own company debentures rather than government debt widened 6 basis points this week to 149 basis points, according to Bank of America Merrill Lynch’s Global Broad Market Corporate Index. The last time spreads rose in a week was in the period ended Feb. 12. Global corporate bond issuance tumbled 56 percent to $19.6 billion, data compiled by Bloomberg show.

Investors retreated from credit markets on concern that worsening government finances may undermine the global economic recovery, curbing revenue and providing less of a cushion for borrowers to meet debt payments. Before this week, investors drove corporate bond spreads to a 2 ½-year low, generating total returns of about 22 percent including reinvested interest since the market bottomed in March 2009.

“Corporate bonds could only defy gravity for so long,” said Eric Cherpion, deputy head of syndicate at Societe Generale SA in London. “The volatility from Greece is pushing spreads out, which have remained tight despite the credit risks in the market.”

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