A number of buysiders were taken aback by last week's 10-15 basis point tightening in corporate spreads during another round of equity market turmoil, and some are forecasting there may be further tightening. "It's rather unusual to watch a corporate rally when stock prices go down," says Greg Habeeb, portfolio manager at Calvert Asset Management Group, who runs $2 billion assets for the Bethesda, Md.-based firm. Players put the tightening down partially to technicals, as some Street firms were caught short in the final week of the quarter, and positive fund flows in to the mart.
Lisa Stange, portfolio manager with Principal Capital Management in Des Moines, Iowa, agrees with Habeeb, noting that volatility in the stock market has generally forced people into Treasuries or agencies, leaving corporate yields largely ignored. She cites the short-covering and positive fund flows as the drivers behind the tightening. She looks for spreads to continue to tighten across the credit curve, arguing that bonds were much more rationally priced at the beginning of the year than equities.
Karen Kelleher, portfolio manager at Conning Asset Management in Hartford, Conn., sees the corporate market as being in a rationalization process, citing as examples paper from upper I-grade issuers Motorola (A2/A) or Nortel (A2/A) trading at 300 to 500 basis spreads off the curve. She, like Stange, sees it as a case of the bond market having aggressively priced in bad news, with the "equity markets just now catching up." On the sell-side, Steven Zamsky, corporate bond strategist with Morgan Stanley Dean Witter, is very positive on the corporate bond outlook. He predicts that within six to 12 months, investment-grade spreads should tighten across the board by 15 to 30 basis points.