Overall corporate bond yields rose to 4.85 percent as of Aug. 25 from 4.68 percent at the end of last week, according to the Bank of America Merrill Lynch U.S. Corporate & High Yield Index. The measure ended July at 4.5 percent. Yields touched 4.91 percent on Aug. 24, the highest since March 3.

'Wait-and-See Mode'
The extra yield investors demand to own corporate debt instead of Treasuries expanded 11 basis points in the week to 338 basis points as of Aug. 25, according to the Bank of America Merrill Lynch index. The index reached 339 on Aug. 24, the most since October 2009.

“Yields are so expensive that a lot of people, like myself, are sort of in a wait-and-see mode,” said William Larkin, a fixed-income money manager at Salem, Massachusetts- based Cabot Money Management, which oversees $500 million. “There's a lot of concern over what the Fed may do. Right now, cash is probably not a bad investment to hold.”

Borrowing costs are rising as reports this week showed home prices in the U.S. fell 5.9 percent in the second quarter from a year earlier for the biggest decline since 2009 and overall business activity in the mid-Atlantic region factories fell to minus 10 in August.

Lower Forecast
The U.S. will expand 1.5 percent this year, down from a previous forecast of 1.7 percent, Goldman Sachs economists in New York including Jan Hatzius said in an Aug. 19 note. For the fourth quarter, JPMorgan predicts 1 percent growth in U.S. gross domestic product, versus an earlier projection of 2.5 percent, the bank said last week.

“Corporates are fine, there's a lot of good positive cash flow and cash on balance sheets,” Cabot's Larkin said. “It's the economic direction, the bigger picture, that's very confusing right now and things are very expensive. That creates a wait-and-see attitude.”

PepsiCo sold $1.25 billion of debt on Aug. 22, Bloomberg data show. The Purchase, New York-based maker of the namesake soda issued $500 million of three-year, 0.8 percent notes that pay 57 basis points more than similar-maturity Treasuries and $750 million of 10-year, 3 percent bonds at a spread of 97 basis points, Bloomberg data show.

Illinois Tool Works
Illinois Tool Works, the maker of Hobart food mixers and Duo-Fast nail guns, sold $1 billion of bonds on Aug. 24 split between 10-and 30-year debt, the data show.

The shutdown of the market for speculative-grade borrowers, graded below Baa3 by Moody's Investors Service and lower than BBB- by Standard & Poor's, came as the debt faces its worst monthly loss since November 2008.

High-yield, high-risk, or junk, bonds have declined 5 percent this month through Aug. 25, Bank of America Merrill Lynch index data show.

Investment-grade bonds have declined 0.3 percent in August, poised for the second monthly decline this year after losing 0.8 percent in June, Bank of America Merrill Lynch index data show.

An announcement by Bernanke of further monetary easing would bolster confidence among fixed-income investors and help reverse some of this month's under-performance, said Wilmer Stith, who manages $3 billion of bonds for MTB Investment Advisors in Baltimore.

“If they do it, that would help risk assets, including investment-grade and high-yield bonds,” Stith said.

Bloomberg News

Copyright 2011 Bloomberg.
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Aug. 25 (Bloomberg) — Central bankers began arriving for their annual policy symposium in Jackson Hole as economists from Citigroup Inc. to UBS AG cut forecasts for global growth and predicted interest rates will stay on hold until at least 2013.
Citigroup said the world economy will grow 3.8 percent this year and 4 percent in 2012 in purchasing power parity terms, down from 4.2 percent and 4.4 percent. UBS cut its estimate for expansion next year to 3.3 percent from 3.8 percent and Societe Generale SA pared its forecast to 3.9 percent from 4.6 percent.
The worsening economic outlook provides the context for three days of talks in the Wyoming resort featuring officials including Federal Reserve Chairman Ben S. Bernanke and European Central Bank President Jean-Claude Trichet. While global recession will be avoided, weak growth will force the Fed, ECB and Bank of Japan to leave borrowing costs unchanged through at least next year, Citigroup, Societe Generale and UBS said.
“A perfect storm hit this summer, driven by the turbulent winds of the euro debt crisis, U.S. debt ceiling, Tea Party, and concerns on the sustainability of the recovery,” Societe Generale economist Michala Marcussen said. “As financial market turmoil intensified, the storm clouds darkened further. Damage has already been done to the world economy, and the U.S. and Europe are now growing at close to stall-speed.”
Economic growth is deteriorating after the Standard & Poor's 500 Index lost as much as $1 trillion since the U.S. was stripped of its AAA rating by S&P on Aug. 5. European officials are struggling to deal with a debt crisis which is nearing its third year and this month jolted France for the first time.

Sovereign Debt

Deteriorating financial conditions, the inability of policy makers in the U.S. and Europe to deal with sovereign debt challenges, the likelihood of more restrictive fiscal policy and slower trade were behind UBS's growth downgrade, economists led by Larry Hatheway said in a report to clients.
Equity analysts at Credit Suisse Group AG said in a separate report that their core scenario is for a “sub-par recovery” worldwide with only a 20 percent chance of the world falling back into recession. Emerging markets accounting for about half of global gross domestic product will help the world to avoid contracting, they said.
The outlook will likely force central banks to keep interest rates at or near record lows, the economists said. The Fed has already pledged to hold its benchmark rate near zero for another two years. The ECB has lifted its benchmark twice this year to 1.5 percent to fight inflation. The Bank of England's key rate is at 0.5 percent and Japan's is between zero and 0.1 percent.