NEW YORK, Aug 10 (Reuters) - Philadelphia-based Janney Montgomery Scott has reduced its recommendation on U.S. investment-grade credit to marketweight from overweight, the second firm to make such a move in the past five days.
Strategists are becoming less bullish after a massive rally reduced the record high yields corporate bonds were paying relative to Treasuries during last year'scredit crisis.
Independent research service CreditSights changed its position to marketweight from overweight on Thursday, saying weakened consumers will keep demand weak, making current values on corporate bonds difficult to justify.
Janney Montgomery Scott said its decision was based on the slow economy, sequentially poorer earnings, corporate bond valuations after the recent rally and the potential for greater new issue supply in the coming months.
"Investors are likely facing the end to the seven-month credit rally, but an aggressive move lower seems unlikely, as there remains a substantial amount of cash on the sidelines that could help to support the markets into an initial sell-off," chief fixed-income strategist Guy LeBas said in a research note.
New issuance has been muted because of a traditional summer lull and because many companies were barred from marketing securities during the recent earnings season. Bond sales typically surge in the fall as blackout periods end and market participants return from summer vacations.
Light supply last month added fuel to a corporate bond rally, narrowing yield spreads over Treasuries by 58 basis points. Investment-grade corporates on average now yield about 254 basis points more than Treasuries, down from a record 656 basis points in December, according to Merrill Lynch indexes.
CreditSights said on Monday its more cautious stance is still warranted despite better-than-expected jobs data on Friday that spurred strong buying of stocks and corporate bonds.
Apart from the government sector or companies benefiting from its largess, the underlying picture of a very weak labor market has not changed, CreditSights analyst Louise Purtle said in a report. Although an improvement from June, the 247,000 jobs lost in July were still as bad as some of the worst months during the 2001 recession, she noted.
"We advocate a defensive posture overall and up-in-quality trades into further strength," she said. Any sell-off will likely be limited, however, because demand will resurface if corporate spreads widen, she said. (Reporting by Dena Aubin; Editing by Dan Grebler)
