JPMorgan Sees Bulls in High-Grade Debt; Arch Coal Selling Bonds

Investors surveyed by JPMorgan Chase & Co. are the most bullish on investment-grade bonds in more than nine years as they demand the least relative yields since the start of the financial crisis. Arch Coal Inc. plans to raise $300 million in a private offering of secured notes.

About 50 percent of investors in the JPMorgan survey are overweight investment-grade credit in their portfolio, the most since April 2004, meaning they’re wagering a larger portion than benchmarks, Eric Beinstein, the bank’s head of high-grade strategy, said today in a research note. About 5 percent of respondents are underweight.

The optimistic view on credit comes as the extra cost investors demand to hold the debt instead of similar-maturity Treasuries touched the lowest in more than six years yesterday, according to the Bank of America Merrill Lynch U.S. Corporate Index. A benchmark gauge of U.S. corporate credit that reached the lowest since November 2007 at the start of the week was little changed as growth in retail sales added to speculation the Federal Reserve will reduce stimulus that’s bolstered credit markets.

The average relative yield on dollar-denominated, investment-grade corporate bonds in the Bank of America Merrill Lynch index fell yesterday to 137 basis points, or 1.37 percentage points, the least since August 2007. The JPMorgan analysts are forecasting spreads in their bank’s index to continue tightening next year by another 15 basis points.

Credit Swaps

Investment-grade spreads narrowed 0.3 basis point today, Bloomberg data show. The measure for speculative-grade, or junk-rated, debt tightened 1.1 to 541.6.

Junk bonds are rated below Baa3 by Moody’s Investors Service and lower than BBB- at Standard & Poor’s.

The Markit CDX North American Investment Grade Index, a credit-default swaps benchmark used to hedge against losses or to speculate on creditworthiness, held at 70.3 basis points as of 5:01 p.m. in New York, according to prices compiled by Bloomberg. The measure has climbed from 67.3 on Dec. 9, the lowest closing level since November 2007.

The index has risen as speculation mounts that the Fed is gearing up to start reducing $85 billion of monthly bond purchases as the economy improves. The share of economists predicting the Fed will pare its stimulus in December has doubled to 34 percent after a Dec. 6 report showing the unemployment rate fell in November to a five-year low.

Taper Speculation

Retail sales rose more than forecast in November as Americans bought cars and took advantage of discounts going into the holiday-shopping season. Purchases climbed 0.7 percent, the most since June, after a 0.6 percent advance in October that was larger than previously reported, Commerce Department figures showed today. The median forecast of 83 economists surveyed by Bloomberg was for a 0.6 percent gain.

The confidence of debt investors in Computer Sciences Corp, the technology consultant, fell after the company disclosed that it may face a regulatory action from the U.S. Securities and Exchange Commission as part of an accounting probe. Credit swaps tied to the Falls Church, Virginia-based company’s $2.5 billion of bonds and loans rose 4.4 basis points to 109.3 basis points.

Credit swaps, which typically rise as investor confidence deteriorates and fall as it improves, pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt.

Arch Coal

Arch Coal is planning its bond sale as the coal producer prepares to redeem shorter-maturity securities. The St. Louis-based company intends to issue second-lien notes due in 2019, it said today in a statement.

The market for corporate borrowing through short-term IOUs surged the most in 16 months as demand from money-market mutual funds increased.

The seasonally adjusted amount of U.S. commercial paper climbed $31.7 billion to $1.081 trillion outstanding in the week ended yesterday, the Federal Reserve said today on its website. That’s the biggest jump since an equivalent dollar rise for the period ended Aug. 1, 2012, and the highest level since the week ended Oct. 30.

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