By Jonathan Stempel
NEW YORK, Nov 29 (Reuters) - U.S. corporate bonds in November posted one of their strongest rallies in recent memory as bond sales doubled. The rally may soon peter out, though not send the $4 trillion market back to its dark days of summer.
"The corporate bond market is going as the stock market goes," said Curt Mitchell, who helps invest $18 billion for Loomis, Sayles & Co. in Chicago. "I would expect to see the rally continuing through the end of the year, though into next year it's anyone's guess."
Investors confident the U.S. economy will charge ahead avoided U.S. Treasuries and their mostly sub-5 percent yields, buying riskier corporate bonds and stocks as the immediacy of WorldCom Inc.'s late-June accounting bombshell fades. The Standard & Poor's 500 stock index rose 6 percent in the month.
Household names as General Motors Corp. and International Business Machines Corp. took advantage of the demand before any economic resurgence could drive yields, and their borrowing costs, higher. Issuance totaled about $43.7 billion in November, up from $21.3 billion in October.
Even the high-yield, or junk, bond market, long weighed down by corporate fraud and record defaults, perked up.
HIGH-YIELD POWERS HIGHER
Sales of bonds rated below "Baa3" by Moody's Investors Service and "BBB-minus" by Standard & Poor's totaled $5.25 billion, twice the $2.64 billion in October. This included sales this week from R.H. Donnelley Corp. , which sells Yellow Pages advertising, and jeans maker Levi Strauss & Co.
The bonds rose 6.19 percent, the most since January 2001, Merrill Lynch & Co. said. Junk bond mutual funds took in about $2.6 billion of cash in four weeks, AMG Data Services said.
"It's one of the best months I can remember, and I've been around 15 years" in high-yield, said Paul Ocenasek, who runs the $600 million Lutheran Brotherhood High-Yield Fund . "Perhaps some bonds rose more than they should."
Investment-grade bonds in November performed less well in absolute terms -- up 1.11 percent, Merrill Lynch said, though Treasuries fell 1.18 percent. For the year, investment-grade bonds are up 6.58 percent and junk bonds down 3.35 percent, while Treasuries are up 8.56 percent, Merrill Lynch said.
Corporate bonds' November outperformance translated into shrinking "spreads," the extra yield that investors demand to buy the bonds in lieu of Treasuries. The investment-grade spread shrank to 1.94 percentage points from 2.4 percentage points, and the junk spread to 8.76 percentage points from 10.37 percentage points, Merrill Lynch said.
Market participants expect early December to be strong for corporate bonds and new bond issuance before investors shut their books for the year.
U.S. military action in Iraq or attacks on U.S. soil might derail any further rally, while a strengthening economy might give the November rally legs, market participants said. Reports this week showed higher U.S. new home sales, manufacturing activity and consumer confidence, and falling jobless claims.
FEAR OF RISK SUBSIDES
Not all of November's gains translates into actual money in investors' pockets. This is because in a rising interest rate environment, bond prices can fall, even if spreads narrow. And in November, the yield on the benchmark 10-year Treasury note rose to 4.21 percent from 3.9 percent.
IBM, the Armonk, New York computer giant, on Nov. 20 sold 4.75 percent 10-year notes at 98.204 cents on the dollar to yield 0.93 percentage points more than Treasuries. Though the spread is now just 0.85 percentage points, the price has fallen to 97.66 cents, according to NASD bond pricing service TRACE.
Other bonds are faring better. Donnelley, based a few miles south of IBM in Purchase, New York, on Tuesday sold 8.875 percent eight-year senior and 10.875 percent 10-year subordinated notes at 100 cents on the dollar. These rose to 104.625 cents and 105.75 cents within a day, traders said.
Loomis, Sayles' Mitchell said auto and telecom bonds have rallied strongly but have room to move higher. "Autos, telecoms and utilities are the places where you can make, or lose, a lot of money," he said.