By Dena Aubin
NEW YORK, April 17 (Reuters) - U.S. high-grade corporate bonds were mostly unchanged on Thursday as trading wound down ahead of the long Easter weekend, while junk bond prices rose one-half point as returns for the year crossed into double-digit territory.
"It's all about cash flow into (junk bond) funds, and we continue to see that," said Matt Stedman, head of high-yield sales for Morgan Joseph. "That will provide a strong underpinning to the market going forward."
Junk bonds on average have posted total returns, including interest and price appreciation, of 10.1 percent this year, according to Merrill Lynch & Co.
Spreads, or the yield premiums that junk bonds pay over Treasuries, have narrowed to 6.93 percentage points, their tightest level since last May, Merrill Lynch reported. Spreads narrow as investors demand less compensation for the risk of holding junk bonds.
In Thursday's activity, investment-grade bond prices overall fell with Treasuries, leaving yield spreads unchanged on the day, traders said.
For the week, corporate bond spreads on average narrowed by about 0.05 percentage point to 1.45 percentage points more than Treasuries, their tightest level since March 2000, according to Merrill Lynch.
In the junk bond market, trading was slow "but bonds in general are up about one-half point with a very good bid," said Morgan Joseph's Stedman.
With Treasury yields mired near their lowest levels in a generation, investors have been snapping up higher-yielding corporate and junk bonds, pushing prices higher and yield spreads tighter.
In the government market, demand for safe-haven Treasuries slipped after a survey of manufacturing activity painted a less dire picture of the economy than many had expected. The Federal Reserve Bank of Philadelphia said manufacturing in the mid-Atlantic region stayed weak in early April, but expectations for the future were more upbeat.
Treasury 10-year notes fell 4/32, yielding 3.959 percent.
Spreads on Ford Motor Co.'s bonds tightened for a second straight day after the world's second-largest automaker reported stronger-than-expected earnings.
Ford's 7.25 percent notes due in 2011 traded at 3.56 percentage points more than Treasuries, against 3.85 percentage points late Wednesday, bringing their two-day tightening to about 0.60 percentage point, according to MarketAxess.
Ford said on Wednesday that cost-cutting and improved earnings at its finance arm offset lower car sales, helping boost first-quarter results. Ford said it cut $638 million in costs from its automotive business in the first quarter, more than its target of $500 million for all of 2003.
The results demonstrate that Ford "is executing on costs," likely putting off any day of reckoning on the company's ratings until later in the year, fixed-income research service CreditSights said in a report on Thursday.
Analysts had worried that Ford, which is in the middle of a restructuring, would face rating downgrades if it did not meet targets to turn around its struggling operations.
In the primary market, companies sold just $1.2 billion of investment-grade debt and $1.5 billion of junk bonds during the holiday-shortened week.
To see other recent or upcoming corporate bond sales, click on [nNEUBD4]