Corporate bond spreads are responding to the ebbs and flows of the U.S. presidential election's homestretch and could widen out if Sen. John Kerry gains in the polls, according to strategists. Last week, spreads on Ford Motor's 7%s of '13 tightened 10 basis points to 208-205bps over 10-year Treasuries on the heels of the Republican National Convention, on the view a Bush win will be a boon to corporate balance sheets and his election chances are stronger.
But a tight race is expected to mean just the opposite for spreads: triple-B industrials, which are seen as high-beta and a proxy for corporate health, widened 30-40bps following the conventions in 1992 and 2000. Both races turned out to be heated elections. And if the race turns into a dogfight again this year, spreads will likely gap out in a similar manner, predicted Mike McNulty, U.S. credit strategist at ABN AMRO.
"With more conviction that Bush will win the race, corporate spreads rallied," McNulty said, noting the convention provided some clarity to the race. He mentioned Bush's speech at the convention, in which he outlined his specific agenda as president, was reassuring to a market that is nervous about uncertainty. In 1992, following President Bill Clinton's win, spreads took over a year to return to prevailing levels but in 2000, after the election was resolved in the electoral college, spreads recovered quickly.
To be sure, the increased likelihood of a Bush reelection is only one of many factors contributing to the current tight corporate spread environment. The lack of a terrorist event during the political conventions and the Olympics, healthy corporate balance sheets and the lack of new issuance are other factors playing a major role.
But market professionals agree the less-heated election is contributing to the tightening market. "In spite of newspapers trying to rile things up, there's a certain level of consensus that has built up [about the outcome of the election]," said John Tierney, investment-grade credit strategist at Deutsche Bank, referring to the view in some quarters that a Bush win is likely.
Given performance in the last two close elections, McNulty expects spreads to back up if polls indicate the race is again close. "If polls show we're in a heated race, spreads should slowly grind wider to the tune of 30bps," he noted. Tierney agreed election uncertainty would negatively impact credit. Bush held a seven-point lead over Kerry as BW went to press late last week, according to the latest Gallup poll.
