Uneasy days ahead for US credit markets (Reuters)

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Wednesday October 4, 10:44 am Eastern Time

WORLD BONDS-Uneasy days ahead for US credit markets

By Richard Leong

NEW YORK, Oct 4 (Reuters) - Weighty issues will keep the U.S. credit markets jittery through year-end as dealers cope with a tight U.S. presidential contest, worries over oil prices and concerns that an economic slowdown could trigger rising corporate defaults.

But market experts said these are more ordinary obstacles to manoeuvre around than they faced in the waning months of the past two years.

Liquidity worries from a possible Y2K computer-glitch in 1999 and the global credit scare in the fourth quarter of 1998 both prompted Federal Reserve action to keep plenty of money flowing.

No such aid is expected this year, leaving bond fund managers with their work cut out for them to hang onto narrow gains.

``It's been every bit as difficult as last year,'' said Jim Conroy, senior bond portfolio manager at Citigroup's SSB Citi Asset Management Group in New York, who is responsible for $4 billion in bonds for four mutual funds.

The inflation-wary Fed is seen as out of the action for the rest of the year, but not out of the picture after it warned on Tuesday of risks posed by rising energy costs and tight labour markets.

At the end of September, the widely watched Lehman Brothers Aggregate Bond Index had a year-to-date total return of 7.12 percent, three percentage points higher than a typical money market fund. In 1999, the Lehman index ended down 0.8 percent.


Market experts are concerned that the cost of borrowing for corporations could spike higher as falling profits push up the interest rates earned on corporate bonds compared to their Treasury benchmarks. The gap between yields on corporate debt and Treasuries of comparable maturity is known as the spread.

``I'm increasingly concerned with corporate spreads,'' said Jim Paulsen, chief investment officer at Wells Capital Management in Minneapolis, who oversees $50 billion in bonds. ``The spreads will go even wider when the economy slows.''

Witness Xerox Corp. (NYSE:XRX - news), the world's No. 1 maker of photocopiers, which saw its spreads blow out 1.50 percentage points on Tuesday to yield four percentage points over comparable Treasuries after it warned it would post a third-quarter loss.

Xerox, along with Intel Corp. (NasdaqNM:INTC - news), was part of a wave of companies issuing dreary outlooks for their bottom line in recent days.

Yield spreads between corporate bonds vs. 10-year Treasury notes now are three to four times above historical averages. On top-rated corporate paper, spreads are about 1.25 percentage points while those on junk bonds are about six percentage points -- levels wider than those seen at the height of the 1998 credit crisis.

Even if the economic slowdown sticks to a ``soft landing'' scenario, bond strategists are very cautious.

``We are setting a whole new set of ranges. We have not even seen the worst yet,'' Paulsen cautioned.

But the deterioration in corporate credit quality may not be enough to halt the expected strong supply.

``Given the benign rate outlook, we think it's much more conducive to a pickup in issuance activity,'' said Diane Vazza, head of Standard & Poor's fixed global income research.


Bond players also are wary of the budget plans put forth by the two leading U.S. presidential candidates because they may eat into the budget surpluses now being used to whittle down federal deficits.

``There may not be any more money to buy back bonds,'' Conroy cautioned.

Republican nominee Texas Governor George W. Bush proposes a $1.3 trillion package of tax cuts over 10 years, while Democratic candidate Vice President Al Gore wants to increase government spending in education and health care, which critics say could cost some $2 trillion over the next decade.

The 30-year Treasury bond has rallied this year as market players snapped them up after the Treasury Department began using the surplus to retire up to $30 billion of old government bonds this year. Any sign of a slowing in the debt buybacks would be bad for bonds.


Uncertainty about oil prices, which have recently subsided from 10-year highs, has cast a dark cloud over the bond market. "Oil has taken an emotional toll on the market," said Conroy. Paulsen projected that if crude prices were to drop to the mid-$20 a barrel area, the yield on long Treasury bonds could fall to 5.50 percent.

But if oil prices were to soar near $40, long bond yields could test the 6.15 percent mark.

-- (M@rket.trends), October 04, 2000


http://markets.ft.com/ft/gx.cgi/ftc?pagename=View&c=Article&cid=FT3HLZ UE7EC&live=true&tagid=IXLTEW9YICC&subheading=bonds


Corporate bond crisis grows amid credit fears

By Aline van Duyn in London and Joshua Chaffin in New York

Published: October 11 2000 19:43GMT | Last Updated: October 12 2000 01:11GMT

Corporate bond spreads in the US and Europe widened sharply on Wednesday as credit concerns moved beyond the telecoms sector to infect nearly every other market.

Some analysts compared the crisis with the one that swept credit markets in late 1998, following Russia's default. The main difference, however, is that bonds issued by industrial companies have been worst hit. In 1998, it was bank credit.

"We are seeing a broad-based shedding of risk," said Evan Kalimtgis, a strategist at Credit Suisse First Boston in London. "The best example of this is the 20 basis point widening in tobacco bond spreads, even though there has been no tobacco-specific news."

Bonds have been dented by several recent events, such as earnings shortfalls.

But these credit quality issues appear to have taken on increased resonance with investors because they are coming against a backdrop of other concerns, including slower economic growth, a weak euro and high oil prices.

The increased volatility in the equity markets is another sign of the rising risks faced by companies, and bond investors are starting to re-price their investments.

"It's a quasi-panic," said Steven Zamsky, a strategist at Morgan Stanley Dean Witter in New York. "You've got a crisis of confidence going on in the market right now."

The spread over Treasuries for Morgan Stanley's corporate bond index widened 13 basis points last week, and was estimated to be another 10 basis points wider early on Wednesday.

In the euro-zone market, the Credit Suisse First Boston index of industrial corporate bonds has widened to about 120 basis points over government bond yields, close to its widest level ever reached.

Losses began last week after Owens Corning filed for bankruptcy, dragging down the bonds of other companies with asbestos liabilities. But the worst losses in the US have come in the high yield telecoms sector. After accounting for the lion's share of new issuance in junk bonds in recent years, telecoms paper has suddenly become unsaleable to investors.

It seems the glut of issuance has made investors question the companies' business plans. "The telecoms bubble is definitely bursting," one syndicate official said.

Traders said spreads on bonds in the banking sector, until now one of the best performing sectors, had widened by 10-15 basis points on Wednesday due to concerns about their exposure to speculative telecoms paper.

In a memo sent to managing directors at Deutsche Bank, whose shares have been hit by these concerns, Edson Mitchell, head of global markets, said that despite turbulence in the high yield market the bank was "continuing to increase market share during this difficult period".

-- (M@rket.trends), October 15, 2000.



Monday October 16, 10:43 am Eastern Time

TRADE IDEA-More corporate bond woes on the way-Salomon

NEW YORK, Oct 16 (Reuters) - Following a poor week for U.S. investment-grade corporate bonds, Salomon Smith Barney recommends that investors stay defensive and be prepared for more disappointment.

``(G)iven the performance many investors have experienced this year, we expect there to be few heroes or bottom fishers,'' said Salomon. ``There should be no doubt now that there are serious credit issues and that some of corporate America has overextended on the debt side.''

Fundamental, not technical, factors are driving the current weakness, Salomon wrote.

Last week, Middle East tensions, rising oil prices and more warnings of lower-than-expected earnings caused spreads, the yield difference between corporate bond and comparable maturity U.S. Treasuries, to widen 12 to 15 basis points.

``Over the past several weeks, the corporate market has adopted a zero tolerance attitude toward event risk and credit uncertainty,'' Salomon wrote. ``What began with earnings warnings among specific industry subsectors...has progressed to a series of external shocks, including the difficulties with oil, the weak euro, and most recently, political turmoil in the Middle East and the Philippines.''

These events, it wrote, have ``overpowered recent positive technical aspects of the corporate market, forcing spreads to historically wide levels.''

At the same time, it wrote, another ``disturbing'' element has arisen: spread volatility has increased ``dramatically.''

That, Salomon wrote, is because fewer market makers are actively trading corporate bonds, and because of six external shocks in the last four years: the 1997 Asian currency crisis (twice), the Russian currency crisis and its aftermath, the Y2K liquidity scare, the inversion of the Treasury yield curve, and the current Middle East tensions.

As a result of these events, dealers have over the last few years committed less capital to trading corporate bonds, at a time when issuance has doubled.

This leads to a ``significantly thinner'' market, Salomon wrote, focused heavily on trying to trade ``distressed'' investment-grade bonds.

Nearly 50 credits this year, it wrote, have ``blown up,'' or seen their yield spreads widen 1 percentage point or more in a month. Many investment-grade bonds now trade, like junk, on price instead of spread. These include, among others, bonds from Crown Cork & Seal Co. (NYSE:CCK - news), Comdisco Inc. (NYSE:CDO - news), Dillard's Inc. (NYSE:DDS - news), J.C. Penney Co. (NYSE:JCP - news), Owens-Illinois Inc. (NYSE:OI - news), and Xerox Corp. (NYSE:XRX - news), Salomon wrote.

``Among investors the pain level is very high,'' Salomon wrote. While technicals remain ``relatively good,'' some investors' portfolios are ``partially untradable now and many must sit with much of what they own.''

The corporate bond market, Salomon concluded, is bifurcating into two: one in which a handful of bond issues trade actively, and one in which most bonds trade at wider-than-normal bid/offer spreads. While this happens, Salomon wrote, ``performance will be subpar.''

Investors who use major bond indexes to help them structure portfolios should move to a market weighting in corporate bonds, Salomon wrote, and move to an underweighting if the U.S. economy shows signs of a ``hard landing,'' which Salomon does not now foresee.

-- (M@rket.trends), October 16, 2000.

http://www.thisislondon.co.uk/dynamic/news/business_story.html?in_revi ew_id=327727&in_review_text_id=270768


Debt in crisis as banks put up shutters


Debt is in trouble. William Gross, who manages the world's largest bond fund, has told investors to avoid corporate bonds at all costs. If they take his advice, companies will have to look elsewhere for money. There are only two other sources. Companies can borrow from banks or they can sell shares.

Until recently banks have been happy to lend. Things may be changing, with telecoms starting the rot. Banks do not want to lend to them anymore - in fact they want some of their money back. So far this year European telecoms companies have borrowed $171 billion (B#118 billion) and they need another $100 billion to pay for their new mobile phone licences. This has made banking supervisors nervous and they are telling the banks to reduce their exposure to the industry.

Many banks are overexposed to telecoms. Schroder Salomon Smith Barney estimates that these loans amount to 74% of ABN Amro's capital.

Michael Foot, who heads banking supervision at the Financial Services Authority, thinks that the watchdogs should have realised the problem a bit earlier. This self-criticism is a welcome change from the usual attitude of regulators. The FSA is probably on safe ground anyway. Once the mobile phone licences were put up for auction a rise in debt was bound to happen. Governments would not accept bids for the licences in shares. They showed an old-fashioned preference for money. The mobiles companies could not raise equity in advance, as they did not know who would win the auctions. A huge rise in bank loans to provide bridging finance was inevitable.

None of this need cause a problem provided all goes smoothly. As governments use the auction money to repay debt, investors are flush with cash. This could be used to buy lots of new telecoms shares and allow the companies to pay off their debts. But things may not go smoothly. The investors who have sold government bonds do not necessarily want corporate bonds or shares. Stock markets are not welcoming new share issues.

The problem is the equity bubble is built on debt. In the US and Britain, the major buyers of shares have for some time been companies rather than individuals or institutions. As they also need to borrow to finance their businesses, their debts are rising rapidly. So long as banks are prepared to lend, financing the debt is no problem. But in the US the problems seem widespread. Last week US banks reported a sharp rise in non-performing loans.

If banks will not lend and investors will not buy bonds, companies will have to sell shares. As they seem to be the last buyers around, it is no wonder stock markets have the jitters.


B) Associated Newspapers Ltd., 23 October 2000

-- (M@rket.trends), October 24, 2000.

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