Corporate bonds grind to a halt

NEW YORK (CNNMoney.com) -- The corporate bond market is in the middle of a slump as the appetite for riskier assets has once again dwindled.

No companies issued corporate debt on Friday -- the day before Memorial Day weekend -- and only five sold bonds the day after the long weekend, according to Dealogic, a financial analytics firm. The last time that happened on a trading day was Sept. 4, 2009 -- the Friday before Labor Day weekend.

While this could be partially attributed to the Memorial Day holiday, the slump in corporate bond sales, coupled with rising prices to insure those bonds against default, could be signs that credit markets are tightening again.

Given the host of geopolitical and economic concerns that have risen in the last month, this shouldn't come as a complete surprise, said Jonathan Lewis, principal of New York-based Samson Capital Advisors LLC.

"We have an unusually high tempo of crises occurring at a time when global capital markets have yet to fully heal from the '08 financial crisis," Lewis said.

He points to not only Europe's debt crisis, but stock market volatility following the May 6 "flash crash" and the oil spill in the Gulf Coast as some of the problems concerning investors.

In addition, reports showing slower economic growth in China, growing political tension in Korea, the resignation of Japan's prime minister and fresh wounds in the friction between Palestine and Israel are also concerns.

In such an environment, "how do you properly gauge the fair value for corporate bonds relative to Treasurys?" Lewis asks.

Because they're backed by the U.S. government, Treasurys are often the preferred investment when stocks and corporate bonds fall during times of economic instability.

From June 2008 to September 2008, the return on government bonds was 1.9%, compared to a 7.5% decline for corporates, according to the Bank of America Merrill Lynch Global Bond Index System.

As stocks picked up steam during 2009, however, corporate bonds were much better performers than Treasurys. That trend carried over into the first quarter of 2010.

But since Greece's debt crisis started making big headlines in April, corporate bonds have lagged government bonds again.

Brian Battle, director with Performance Trust Capital Partners, a fixed-income trading firm in Chicago, said investors want more evidence that the U.S. and global economy is getting back on track before they'll have more confidence in corporate bonds.

Investors will look to Friday's jobs report as a barometer of the U.S. economy. According to estimates from Briefing.com. economists expect to show employers added 500,000 jobs in May. Most of those jobs, however, will likely be from government census hires, Battle said.

Bond traders will continue to take their cues from the stock market. If the European debt crisis and other geopolitical issues continue to worry investors, Lewis said there is unlikely to be strong demand for corporate bonds.

But Battle said issuance should pick up somewhat. He said the slowdown was more of a phenomemon caused by light trading around the Memorial Day holiday.

What Treasury prices are doing: Treasury prices fell Wednesday. The benchmark 10-year note slipped 14/32 to 101-19/32 mid-day Wednesday, driving the yield up to 3.32%. Bond prices and yields move in opposite directions.