Corporate bonds managed to hold their own yesterday as traders reported decent buy-side demand for both high-grade and some high-yield securities.
Several traders and dealers said they were surprised by a consistent stream of buyers when volume is usually light.
At yearend, dealers usually must unload their inventory to make room for the following year's new issues. But this year, traders said their inventory has been light and money managers are flush with cash.
The combination yesterday bolstered the market and slightly tightened the spread between corporate securities and comparable Treasuries, even as the government bond market improved.
The situation appeared to be much the same in the junk bond market. One high-yield trader said he "had plenty of bids" for junk bonds with strong credit credentials. Prices of these securities rose 1/8 point to 3/8 point, the trader said, while prices of distressed junk bonds fell in line with the uppertier's advance.
"At the end of the year, dealers usually are pressured to sell," said Robert Flood, a vice president of corporate bonds at UBS Securities Inc., a division of the Union Bank of Switzerland. "But this year, there's not much supply and I'm seeing a couple of buyers."
This slight surge in activity contrasted sharply to both a lackluster new-issue market, which financed a lone $150 million Federal Home Loan Mortgage Corp. deal, and a lightly traded Treasury bond market.
The Federal Home Loan Mortgage Corp.'s noncallable notes, which mature in 2000, sold at a 21-basis-point premium to comparable Treasury securities. The securities sold through a syndicate led by Merrill Lynch & Co.
Treasuries rallied with the long bond leading the way. The 7 5/8 30-year bond gained almost 1/2 point, but thin trading volume exaggerated the bond's surge in price, which closed yesterday to yield 7.38%.
Syndicate desk executives said they expect a slow week in the corporate market, with little if any new-issue activity.
John Lonski, senior economist for Moody's Investors Service, said the week's activity may provide dealers with some volume insight for 1993. While the market had a record year in 1992, it is likely to experience a letdown next year, Lonski said.
This year, syndicate desks floated $214 billion of corporate securities, compared to the previous record of $157.89 million in 1986, according to Moody's.
Lonksi attributed his prediction of a falloff to higher interest rates in the Treasury market that will lead to a decline in refunding of older, higher-yielding debt. Refundings, he said, fueled 1992's record-breaking pace.
"I think the market has been overly optimistic on inflation," Lonski said. "You might see anything for the next three months or so, but after that, you may see a pickup in inflation.