Credit analysts advise caution as corporates retreat, spreads widen

By Ronda Fears

Nashville, Jan. 24 - As corporates begin to retreat and spreads widen amid strong new supply, credit analysts Louise Purtle and Peter Petas of CreditSights advise caution. While they are positive long-term on the credit markets, they suggest a light position short-term.

"Supply is sating New Year demand and the earnings announcements are bereft of market-lifting headlines as geopolitical tensions rise," the analysts said in a report Friday.

"The latest string of economic data raises concerns that the soft patch is getting softer and less patchy. We expect the credit markets to struggle near term and would maintain an underweight position."

Aggregate index spreads closed the week at 171 basis points and the credit default swap market finished approximately 6 basis points wider with much bigger moves in the high beta sectors, particularly telecom (25-30 basis points wider) and utilities (15 basis points wider), the analysts pointed out.

A further $10 billion of investment grade issuance last week brought the year-to-date volume to $33 billion, they added, and the high-yield market has seen $3.25 billion of issuance so far in 2003.

"Despite still-robust reports of fund inflows the issuance calendar has done much already to sate pent-up New Year demand and the market is groaning under the supply as secondary bid lists add to the volume," the analysts said.

Geopolitical tensions, the equity market's tepid response as earnings season got under way in earnest and the somber outlook for the technology sector all play a part, as well. Investors also found plenty to fret about in the industrial sector given price deflation trends in the autos and the extent of the pension and healthcare funding issues.

"But perhaps the greatest constraint on the market's performance this week was a string of dismal economic data that suggested that this economic soft patch was looking softer and less patchy," the analysts said.

"So the credit markets are likely to remain under pressure for some weeks, particularly if supply continues to erode the technical base.

While the structural reasons for overweighting credit for 2003 remain in place we believe it will be an uphill battle in the near-term and would advocate taking some chips off the table and awaiting more constructive re-entry points, both in terms of pricing and clarity of outlook."

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