The corporate bond market continues to gain strength with record issuance and tightening spreads.  2009 was a banner year for corporate bond returns.  As blown-out spreads contracted, investors didn’t have to do much to make money from either yield plays or rising prices.  High-yield bonds earned a staggering 58% total return for the year.  That won’t be true for 2010, however, but the year has begun with corporate bond issuance and investor appetite at record highs. Treasury yields are staying low and investment-grade spreads continue to contract, so both sectors offer little yield incentive for investors.  As a result, investors are continuing to move further out the risk spectrum to pick up incremental yield. Source: Moody's   While traditional lending conditions remain constrained, companies are turning to the capital markets to tap into excess investor liquidity and falling risk premiums.  On a fundamental level, corporate free cash flow continues to improve which supports credit technicals.  As well, the threat of higher rates in the future is an incentive for issuers to tap the capital markets.  Most companies are still not spending on new capital investments, nor are they hiring new workers.  This gives them greater cash and balance sheet strength to service new debt commitments.  Of course, increased share buybacks or cash mergers could fundamentally change that picture as cash is reallocated.  Investors have been receptive corporate buyers and risk premiums continue to tighten.  The boon of new issuance is not without problems, however.  High-yield issuers are still very highly leveraged and they are not using cash raised to improve balance sheet strength.  Most are restructuring existing debts and extending maturities, which in essence pushes out their obligations and increases debt service commitments without fundamentally improving their operating business.  At tighter spreads, investors are not getting as highly compensated for the downside risk. Corporate spreads should continue to tighten in the near-term with lifting uncertainty and continued economic recovery.  While negative economic developments could derail the strength of corporate issuance, we are more likely to see this trend continue to pick-up for some time, especially as more traditional funding sources remain strained.