By Jonathan Stempel
NEW YORK, Jan 28 (Reuters) - U.S. corporate bonds slightly outperformed Treasuries on Tuesday morning on expectations that stocks will rise, adding to investor appetite for riskier assets even with fears of war with Iraq in the background.
Corporate bonds had lagged Treasuries on Monday as chief U.N. weapons inspector Hans Blix said Iraq had fallen short in cooperating with the world body, and failed to prove that it had eliminated illegal weapons. President George W. Bush is expected on Tuesday to press the U.S. case against Iraq when he delivers his State of the Union address to Congress, but to some extent that may be priced into corporate bonds already.
"Spreads in general are slightly tighter on positive stocks," said one investment-grade debt trader. "People have been talking about Bush for a week and a half." Corporate bonds outperformed Treasuries by 0.01 percentage point, traders said.
Analysts said this week that bonds of automakers might lag if U.S. economic growth is weak. J.P. Morgan on Monday eliminated its overweight recommendation on the sector, while on Tuesday independent fixed-income service CreditSights Inc. said it would be inclined to sell bonds of Ford Motor Co.'s finance arm if they strengthen.
"We do not see Ford as a major liquidity risk," wrote analysts Glenn Reynolds and Chris Ucko. They said in the second half of 2003, "Ford risks will really start to pick up, as the company faces a year where it will need to make its plant closing case with the (United Auto Workers), while also rolling out a flagship product in the F-150 (pickup) that constitutes over a fifth of its unit sales" and even more of its revenue.
Ford Motor Credit Co.'s 7.25 percent notes maturing in 2011 and General Motors Corp.'s finance arm's 6.875 percent notes maturing in 2012 were both unchanged on Tuesday, traders said. The former yielded 4 percentage points more than Treasuries, and the latter 3.4 percentage points more than Treasuries, they said.
A Reuters poll of economists at U.S. primary government securities dealers shows that all 22 expect the Fed to leave rates alone on Wednesday after a two-day policy making meeting. Four expect the Fed to shift its statement of risks to the economy to weakness from a balance between weakness and inflation risks. Two were not sure.
In early trading, 10-year Treasuries fell 7/32, as their yields rose to 3.992 percent.
SALES
The corporate bond market is unlikely to see major new issuance before the Fed's rate decision. Sales on Monday totaled $800 million.
Avnet Inc. , a Phoenix-based electronics and microchip distributor, plans to sell $250 million of five-year notes. It said it plans to use some proceeds to buy back up to $117.2 million of its 8.2 percent notes maturing in October.
Laboratory Corp. of America , a national clinical laboratory, plans to sell $350 million of 10-year senior notes to pay down a bridge loan that the company, based in Burlington, North Carolina, obtained to buy Dianon Systems Inc. for $600 million and expand its cancer diagnostic services.
Sempra Energy , the San Diego-based parent of San Diego Gas & Electric and Southern California Gas, plans to sell $300 million of 10-year notes, and use proceeds to pay down short-term debt.
In high-yield, Premcor Refining Group Inc. , an independent petroleum refiner based in Old Greenwich, Connecticut, plans to sell $400 million of seven- and 10-year senior notes to finance a purchase of Williams Cos. Memphis, Tennessee refinery and refinance debt.
Allbritton Communications Co., a Washington, D.C.-based TV station operator, plans to add $180 million of 7.75 percent 10-year subordinated notes to its existing $275 million issue.