Bond buyers are paying through the nose for corporates now that talk of an economic recovery has squeezed spreads razor thin, market players say.

With investment-grade bonds yielding about 9.48%, investors pick up less than 100 basis points for swapping corporates for Treasuries -- the smallest spread since September 1990, according to Moody's Investors Service.

That is nearly 30 basis points less than buyers pocketed over the past five years, when corporate spreads averaged about 127 basis points.

But history aside, "the bias is still towards spreads maintaining their current levels or, perhaps, tightening modestly from here," said Thomas J. Sowanick, senior fixed-income strategist at Merrill Lynch & Co.

Financial service and industrial bonds have steam left, he said, while electric utility issues have probably run their course.

So far in June, corporates have lagged losses in the Treasury market. While the yield on the bellwether Treasury long bond has climbed to its current 8.50% area from 8.26% on June 1, industrial yields have risen just 14 basis points, to 9.48%.

But because public utilities are less cyclical than industrials, triple-A utility yields have matched Treasuries' losses nearly basis point for basis point.

Last November, as investors took shelter from recession in utility issues, their yields trailed industrials by 17 basis points. Now, both are running at 9.48%, according to Moody's.

"I don't think there's a risk spreads will widen significantly over the next few months," Mr. Sowanick said. "The risk is higher with respect to higher interest rates than for wider spreads."

But these measly premiums have got some money managers wondering whether corporates are such a hot buy.

"Are you willing to get just that much additional yield for the risk? For me, the answer is no," said one Midwest portfolio manager. "We're going to see a lot more downgrades, and people should be focusing on the Treasury curve. That's where I think the values is."

One corporate bond skeptic is Doug Langley, vice president at Stone & McCarthy Research Associates in Princeton, N.J., who said corporate buyers, like stock pickers, may have placed too much faith in early signs of strengthening economy.

"The equity market reflects a lot of the same things as corporate spreads and reflects them more quickly," Mr. Langley said. "Two weeks ago, the idea was the economic recovery was so strong we'd be worrying about inflation. Now, there are signs that second quarter earnings are going to be bad again, supporting an argument for wider spreads.

"It's easy to think that spreads aren't going to widen when you see a very optimistic equity market," he said. "But when you see [recent poor earnings projections from] IBM and Waste Management, that doesn't support tighter spreads."

The trouble is, fixed-income buyers looking for those few extra basis points do not have many options.

In the mortgage-backed market, for example, Ginnie Mae 10s now pay just 99 basis points more than the 10-year Treasury note -- a three-year low, according to Mabon Securities Corp.

And with the bond market locked in a narrow trading range, investors have been packing away new corporate issues despite their slim spreads.

"If there is a perception that this dampened volatility will be with us for a while -- you hear a lot of people talking about an 8% to 8.5% range on the T-bond -- the risk of going out and seeking higher-yielding instruments is reduced," said John A. Davis, fixed-income analyst at Provident National Bank in Philadelphia. "That maybe makes yield a little more attractive than convexity, which would help corporates."

So far, "there's been no tangible evidence of a turn in creditworthiness, and everything indicates that coverages are declining and downgrades are outnumbering upgrades, so the market's clearly out ahead of where it should be and where it usually is," Mr. Davis warned.

Even so, "if we're coming out of a recession, I can't see spreads widening much from here," he said. "They'll probably drift a little narrower in the short run and then move back out to the mean if Treasuries head down and call features start getting in the way, or if we get another manifestation of economic weakness."

Yesterday's Market

Corporate bonds slogged through another quiet session as traders looked to syndicate desks for inspiration but found little.

As seasoned high grades barely budged, just one new plain-vanilla issue reached the market.

The Private Export Funding Corp., a quasi-governmental entity, offered $100 million of 12-year notes through J.P. Morgan Securities Inc.

The noncallable securities, which carry Triple-A ratings from the major agencies, were priced as 8.75s to yield 41 basis points more than the 10-year Treasury.

Last January, PEFCO sold $100 million of 10-year notes priced 37 basis points off the Treasury curve.

Meanwhile, commercial bankers got more bad news as Wells Fargo & Co. reported its nonperforming assets will rise by 28% for the second quarter, prompting a downgrade from Standard & Poor's Corp. and a warning from Fitch Investors Service.

Standard and Poor's cut the West Coast bank's senior debt to A-minus from A-plus, preferred stock to BBB from A-minus, and commercial paper to A-2 from A-1.

Fitch, meanwhile, placed the bank's AA senior debt and AA-minus subordinated debt on Fitch Alert with negative implications.

Fitch said the jump in nonperforming assets was "well outside the range we anticipated," estimating the banks' troubled loans will climb to 4.2% of its entire portfolio.

Moody's Investors Service affirmed Well Fargo's senior debt ratings at A2, saying it expects the bank's profitability to be able to absorb the losses.

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