Puget Sound Energy, PSEG sell bonds; market conditions, inauguration distract; financials hurt in trading

By Andrea Heisinger and Paul Deckelman

New York, Jan. 20 - Confidence in the investment-grade bond market did not skyrocket as a new president was sworn in, leading to little activity in the primary save for bond issues from Puget Sound Energy and PSEG Power.

Worries about banks and the financial markets in general may have been contributors to the lack of new deals. There were other reasons, however.

"I think everyone was watching TV," a source said.

In the secondary sphere on Tuesday, a market source said the widely followed CDX Series 11 North American high-grade index widened by 8 basis points on the day to a mid bid-asked spread level of 223 bps from 215 bps on Friday.

Advancing issues surrendered their lead over decliners, which had an advantage of almost three-to-two. Overall market activity, reflected in dollar volumes, gained around 4% from the levels seen Friday, when the market closed early ahead of Monday's Martin Luther King Day observance, which saw U.S. financial markets closed completely.

Spreads in general were seen a little narrower, in line with higher Treasury yields; for instance, the yield on the benchmark 10-year note was 6 bps higher at 238 bps.

With financial names taking it on the chin in the equity market on investor fears on the future of the banking industry, financials widened, particularly Citigroup paper, in line with a 20% drop in the New York-based banking giant's shares.

Puget Sound prices bonds

One of the only deals for the day came from Puget Sound Energy, a utility owned by private investors.

The electric and natural gas company priced $250 million 6.75% first mortgage bonds due 2016 at par to yield 6.75%. They have a spread of Treasuries plus 480.3 basis points, a market source said.

Barclays Capital Inc., Scotia Capital and Wachovia Capital Markets were the bookrunners.

PSEG sells Internotes

New Jersey-based PSEG Power sold $159,299, 919 million of 6.5% five-year Internotes Tuesday.

The company recently launched a retail note program, of which this is the first issue.

The bonds priced at par to yield 6.5% and are non-callable for one year.

Banc of America Securities LLC and InCapital LLC were lead agents.

Ugly day starts week

It was not a pretty day in the investment-grade bond market Tuesday, a syndicate source said after the afternoon close.

No one knew quite what to expect after a long weekend and on the day of a presidential inauguration, but it was ugly no matter what, he said.

"It was mostly financials," he said. "It was not the greatest day. There wasn't any one thing, but just fear in general."

Topping off the fear was a dismal set of earnings announcements on the way.

The trickle began last week with JPMorgan Chase, Bank of America and Citigroup announcing earnings, some of them earlier than planned.

There are more to come, with Regions Bank announcing a quarterly loss of more than $6 billion.

Volume set to pick up

The slow start to the short week should be temporary, a market source said late Tuesday.

At the close of the previous week, he said he thought the scope of the week would be different.

"I originally thought it would be as busy as the last couple weeks," he said, clarifying that he meant the first two weeks of January.

"Today we kind of saw a turn from the last week," he added.

There are still companies out there needing to issue he said, but the day's market conditions may have scared them away.

There are other names that are unable to issue at the moment because of an earnings blackout. Some financial names that may be issuing bonds backed by the Federal Deposit Insurance Corp. also fall under this umbrella.

It is hard to speculate what the rest of the week holds, because it is shortened and because no one anticipated the depressed market of Tuesday.

"You never know," a source said. "Who knew that the Dow would be this low today?"

"No one thought it would be as terrible as it was."

One issue that was announced Friday and has not been seen pricing is a $75 million deal of senior monthly notes due 2038 from American Water Capital Corp.

The bookrunner is Edward Jones.

Sources said they had not seen it price by the end of the day Tuesday.

Indexes wider

A trader said that he saw "I-G spreads out anywhere from 5 to 8 , maybe 5 to 10 bps, based on the index," as the corporates market took its cues from equities.

But cash bonds were seen somewhat better as Treasury yields rose - although financials were a huge exception to that trend.

"Investment grade looks as though it's quoted a little tighter on the day, because Treasuries have backed up," an investor said.

"Investment grade is just not trading," the buy-side source added.

Banks get bopped

There was particularly pronounced weakness in the financials, whose shares were way down across the board, including a 28% drop in Bank of America Corp.'s shares.

A trader said that "the banks in general were weaker," including names like Bank of America and JP Morgan Chase Inc.

However, he saw Citi "moving the most," with its 6½% notes due 2013 widening out to a level around 660 bps bid, 600 bps offered.

"That's how they were last Thursday; they tightened in Friday to 550 [bps bid], 535 [bps offered], and now, they're all the way back out" to those Thursday levels.

Other financial names seen trading at substantially wider levels included Wells Fargo & Co.'s 4 3/8% notes due 2013, which was one of the most actively traded issues on the day, a market source said, quoting the San Francisco-based banking company's bonds at 345 bps bid, versus the 290 bps level at which those bonds had traded last week. Bank of America's 5 3/8% notes due 2014 were seen out 40 bps at 470 bps over.

Goldman Sachs Group Inc.'s 5.75% notes due 2016 widened by 50 bps to the 500 bps level.

Bank, broker CDS spreads widen

In the credit default swaps market, a trader said that the cost of insuring bank or investment bank bonds against possible defaults widened across the board - by 10 bps to 15 bps for the former and 15 bps to 30 bps for the latter, reflecting rising investor unease at the possibility of defaults among the major financials.

He saw CDS costs for B of A paper widening 10 bps to 195 bps bid, 205 bps offered, while Citi's debt-protection cost was 15 bps wider at 295 bps bid, 310 bps offered. Wells Fargo was 10 bps wider and JP Morgan 5 bps.

Among the brokerage firms turned commercial banks, Goldman was 15 bps wider at 310 bps bid, 320 bps offered, while Morgan Stanley was 20 bps wider at 215 bps bid, 225 bps offered. Merrill Lynch & Co., now a B of A unit, was at 225 bps bid, 240 bps offered, out by 30 bps on the day.

Abbott, Altria active

Apart from the financial names, Abbott Laboratories' 5.875% notes due 2016 were among the most actively traded, with over $37 million changing hands. The pharmaceutical company's bonds firmed to about the 220 bps level, a market source said, while its 5.60% notes due 2017 were also busily traded at 180 bps over.

Altria Group Inc.'s 9.95% bonds due 2038 tightened by 50 bps to the 580 bps level. Its 9.70% notes due 2018 tightened to about the 530 bps level.

Times gyrates on Slim news

New York Times Co.'s split-rated bonds were actively traded at sharply higher levels - although mostly on relatively smallish odd-lot trades - on the news that the cash-strapped publisher had lined up $250 million of fresh funding in the form of new high-coupon six-year notes, plus warrants, from current investor Carlos Slim, but the bonds came off those elevated levels later in the day on a series of large-block trades to end relatively little changed.

A trader saw New York Times' 4½% notes due 2010 trading at 87 on a round-lot basis - well up from the 82.25 bid round-lot price seen back on Jan. 8, its last previous large-sized trade, apparently pushed upward by the news that Mexican billionaire Carlos Slim will provide $250 million in much needed cash.

However, he noted that the bonds had been "very active" in odd-lot trading, and a market source at another desk saw those bonds swing wildly from Friday's closing level around 86 to intra-day levels as high as 95, though all on fairly small trades.

Late in the session, though, those bonds began to come down from those peaks, on a series of larger trades in an 85-87 context.

The company placed $250 million of new six-year notes with two companies controlled by Slim - notes carrying a coupon north of 14%, which the trader termed "not a good sign."

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