Corporate bond spreads widened on Thursday after a report showed that surging energy costs lifted wholesale prices in April, stoking concerns that high oil prices will cut into corporate profits.

Rising oil and gas costs led wholesale prices to rise 0.7 percent in April, more than double Wall Street expectations. Anecdotal reports indicate that producers are increasingly able to pass along these costs to consumers.

But if producers are hiking the prices they charge consumers, they are also selling fewer goods, which cuts into profits.

Corporate bond spreads reached their tightest levels since 1998 in late April, but have since widened, as the stock market has given back all its gains for the year and investors have grown concerned that they were overly optimistic about corporate profit growth.

"It’s a skittish market. People aren’t looking for reasons to buy now, they’re looking for reasons to sell," said David Ellis, a corporate bond portfolio manager who helps manage $2.1 billion of bonds for Global Investment Advisors.

In addition to oil reaching its highest price in 13 years, Federal Reserve rate hikes could increase borrowing costs, also cutting into corporate profitability.

Treasuries barely budged on Thursday morning, suggesting that economic reports did not materially change expectations for rate hikes, but higher borrowing costs are still part of the overall climate of concern, portfolio managers said.

One company fretting about rising energy prices is Wal-Mart Stores Inc. (WMT.N: Quote, Profile, Research) , which reported an 18 percent increase in quarterly earnings on Thursday, but also said steep fuel prices may hamper consumer spending.

With the news, Wal-Mart’s outlook "is still positive, but more muted than it was in February," said Sanford Bernstein analyst Emme Kozloff.

Wal-Mart’s 4.55 percent notes of 2013 widened 0.04 percentage point to 0.55 percentage points, according to MarketAxess.

Autos also widened 0.03 or 0.04 percentage point, while energy companies narrowed as U.S. crude oil rose to $41 a barrel, close to a record high.

(Reuters)