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July 14, 2010 Wednesday 10:28 AM EST
LENGTH: 244 words
HEADLINE: Corporate debt to return 4.4% in second half: BofA
BYLINE: Deborah Levine
NEW YORK (MarketWatch) — High-grade corporate bonds will post total returns of 4.4% in the second half of the year, according to Bank of America Merrill Lynch. “U.S. domestic economic growth concerns have replaced the European sovereign crisis as the main driver of weakness in U.S. credit markets,” credit strategists Hans Mikkelsen and Yuriy Shchuchinov wrote in a report released Wednesday. That slower growth is positive for corporate bonds because it means the Federal Reserve will keep interest rates lower for longer — until March 2012, according to the firm. Low rates in short-term debt leave investors reaching out towards longer-dated securities, “thus preserving favorable liquidity conditions in credit,” they said. High-grade debt returned 6.1% in the first half of the year, they said. The gap between corporate yields and Treasury yields will also narrow, which tends to improve returns for bondholders. They expect the yield spread to fall to 140-150 basis points, or 1.4-1.5 percentage point, by the end of 2010. Company debt yields are currently 200 basis points above Treasurys, according to the firm’s corporate master index. The strategists see better performance coming from financial sectors and real-estate investment trusts as well as industrial sectors with yield, including mining and metals and pipelines.
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