Investment-grade bonds see rocky day despite Fed rate cut, new issues a possibility Wednesday

By Andrea Heisinger and Paul Deckelman

Omaha, Jan. 22 - It was what market sources called "a rocky start" to the week that started with a surprise Federal Reserve rate cut.

"It was definitely a rocky day," a source said. "We came into it looking gloomy, and it was pretty back and forth all day."

The rate cut of three-quarters of a point surprised many who were not expecting action until the Fed meeting at the end of the month.

"I don't think anyone was expecting them to jump in and do that," a market source said. "It gave a backdrop for the rest of the week."

Week's prospects uncertain

There were some issues scheduled for sometime this week, but it is unknown now if they will come to the market or not, the source said.

Every equity market was down 5% to 8% to start the day, and the Fed cut turned around stocks but didn't necessarily aid anything else, he said.

"A really good name could still get something done, but it's looking unlikely at this point."

Another source was more optimistic, saying that although initially the markets were unimpressed with the surprise rate cut, as the day progressed it improved the tone in both the equity and credit markets.

"It should set the stage for a relatively decent session tomorrow," he said.

The source also said it is possible that issuers will come into the market despite the rocky conditions. They will simply have to pay the price to do so.

"It's definitely a matter of price," he said. "It doesn't necessarily have to be the best issuers coming in, but they're just going to have to pay a larger price."

There will not be a high volume of new issues for the week, sources said. One source said if someone jumps in others may follow.

"It's possible if things open with a relative sense of firmness we could see an issuer tomorrow," he said.

One issuer that planned to price Wednesday may not go forward.

Harvard University had announced plans last week to issue $387.21 million in five and 30-year corporate bonds. This may not happen, according to a source with underwriter Morgan Stanley.

Morgan Stanley is bookrunner, with Lehman Brothers and Loop Capital Markets LLC as co-managers.

Market mostly better

In the investment-grade secondary market Tuesday, advancing issues outnumbered decliners by a better-than seven-to-six ratio. Overall activity, reflected in dollar volume, jumped about 41% from Friday's shrunken pre-holiday levels.

Traders saw financial bonds generally a bit wider on the day, after Bank of America and Wachovia Corp. each posted disappointing numbers. However, they said there was no sell off, with spreads only modestly wider. CDS spreads on the two companies' debt were actually little changed, reflecting no deterioration of investor confidence in the companies' prospects.

There continues to be trading in the new issues recently priced for United Parcel Service Inc. and Target Corp., although the latter's existing bonds were also seen moving around.

Financials weaker

A trader who watches the financial sector said that in general, "everything was probably a good 10 [basis points] to 15 bps wider, and kind of stayed that way."

He said that the market "did stabilize" at those somewhat wider levels. "It didn't really move up any - but it didn't continuously fall out of bed." While he saw some credits hang in with as little as a 5 bps widening, most that he observed were in that 10 bps to 15 bps range, with some out 20 bps.

The trader said that Ambac Financial Group, Inc. and MBIA Inc. "did seem to find some buyers.

He saw MBIA's 7.15% bonds traded with a 51 handle, while Ambac's 7.50% notes due 2023 trading with a 40 handle; bonds of both companies had been quoted as low as the upper 20s last week, when Ambac was downgraded by Fitch Ratings, losing its valued AAA status with that agency, and both companies were put on watch for possible downgrades by the more influential Moody's Investors Service.

He said that trading in the two bond-insurers' paper was of "decent size. So there are selective buyers out there for these credits at the right levels."

However, he said that overall, "there were [just] handfuls of markets, with no new issuance to speak of" in terms of straight bonds. He called Tuesday "a muted day."

He credited the Federal Reserve rate cut and the fact that equities "held in there" and managed to make up for a lot of their early losses as factors limiting the widening out in corporate bonds.

Among notable movers, Bank of America's 5.75% notes due 2017 were seen having tightened about 5 bps to the 185 bps level, despite disappointing earnings - profits were down 95% from year-earlier levels on mortgage-related writedowns and charges.

United Parcel Service's recently priced 5.50% notes due 2018 were in about 10 bps to the 145 bps level. The existing bonds of Target - which, like UPS, also recently priced a $4 billion multi-part deal that is doing well in the aftermarket - were seen mixed, with its 5.875% notes due 2012 tightening about 10 bps to the 180 bps level, although its 6.35% notes due 2011 widened out about 15 bps to the 175 bps level.

Bank CDS widen

A trader said that credit default swap spreads for bank paper were generally about 2 bps to 7 bps wider. He saw Bank of America's debt protection costs about 2 bps wider at 89 bps bid, 94 bps offered, while Wachovia Bank's were unchanged - despite weak results - at 160 bps bid, 175 bps offered.

He also saw Citigroup's CDS costs move out about 7 bps to 96 bpd bid, 103 bps offered, while JP Morgan's were 4 bps wider at 84 bps bid, 89 bpd offered.

Recently troubled thrift Washington Mutual, Inc.'s CDS costs actually narrowed by 5 bps to 390 bps bid, 415 bps offered.

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