Renewed euro zone worries haunt high-grade primary; Italy 25 bps-75 bps wider; spreads weaken

By Andrea Heisinger and Cristal Cody

New York, July 11 - The high-grade bond market remained empty of new issues for the second day in a row as the week started with volatility from more than one source.

The debt crisis in the euro zone deepened over the weekend as fears grew about Italy's economic health. This, combined with ongoing fears from Greece and Portugal, along with continuing talks about the U.S. debt ceiling, had investors and potential bond sellers shying away from the primary.

The previous Thursday had a good tone and saw companies and investors clamoring to sell bonds. Then on Friday, a dismal jobs report came out that derailed any good tone the market had.

"It was not very constructive today," a syndicate source said after the close. "We were all just watching to see if anything improved and it didn't."

A market source said that he was looking at two or three names that have been looking to sell bonds for the past two weeks, but aren't under any time constraints to do so.

"They could sell in September if they wanted to," the source said.

He added that a strong open on Tuesday or later in the week could lead to some "go" calls.

"There should be a day or two, if [the market] shows any sign of positivity at all, that we have issuance. It will be a lot like last week where you see a couple of days with a lot of deals," the source added.

Corporate bonds traded wider on the flight into safer debt on Monday on a sell-off of Italian investment-graded sovereign bonds. Italy's short-dated notes traded about "25 basis points wider or so" and the 10-year sovereign bond widened as much as 75 basis points on the day, according to an informed source.

Meanwhile, the Markit CDX Series 15 North American investment-grade index eased 4 basis points to a spread of 96 bps, according to Markit Group Ltd.

"We're seeing a pretty big uptick in investor risk aversion and that's pushing spreads wider in the credit markets," one informed bond source said.

"Investment-grades wider by about 4½ basis points on the day. Much of that was at the open this morning and since then, it's stabilized a little. Trading volume was decent for a Monday, so it's not that people are sticking to the sidelines, but there's much better sellers than buyers out there."

Overall trading volume rose 10% to about $10 billion on Monday.

Financial paper also traded wider, in line with the broader markets.

"The big names are wider by about 2 to 3 basis points," a trader said. "Bank of America, JPMorgan, Goldman, Wells Fargo, Citigroup - they're all kind of in the same boat."

In secondary trading, recently priced notes from Bank of America Corp. and Toronto-Dominion Bank edged wider on the general market weakness, traders said.

Treasuries ended strong on the flight-to-safety bid on Monday. The benchmark 10-year note yield fell 10 basis points to 2.92%. The 30-year bond yield dropped to 4.21% from 4.28%.

Italy bonds weaken

Italy's 4½% global notes due June 2015 rose about 25 bps, seen trading at 3.4% yield bid as investors sold off the sovereign notes on fears of a spreading euro debt default crisis.

"Pretty active market," the source said.

The 3.125% notes due Jan. 26, 2015 traded around a 3.45% yield on Monday afternoon. Italy priced the notes on Jan. 19, 2010 at a 3.197% yield.

"The 10-year Italian bonds are weaker by about 65 to 75 basis points today," the source said.

"There's a bigger move in the 10-year area of the curve, which is interesting because we see short-term debt as more representative of potential problems - mainly because the cost of short-term debt really determines whether they're going to be issuing new funding to replace the old."

The 6 7/8% notes due September 2023 were seen "trading around 5.65% yield. That's up almost 40 basis points in yield on the day."

TD Bank flat to weaker

Bonds traded flat to slightly wider on a general weakness across corporate bonds on debt concerns in Europe, according to bond sources.

A trader saw Toronto-Dominion Bank's new 2.5% senior medium-term notes due 2016 (Aaa/AA-) at 84 bps bid, 81 bps offered on Monday. The bonds were quoted ending Friday at 82 bps bid, 78 bps offered. The notes priced at Treasuries plus 85 bps as part of a $2.5 billion three-tranche offering on Thursday.

The bank and financial services company is based in Toronto.

Bank of America widens

Bank of America's 3.75% notes due 2016 priced in the previous week widened 5 bps in the secondary market on Monday, sources said.

The notes were seen trading in the 210 bps area, with much of the activity centered on Friday. Bank of America sold the notes (A2/A/A-) at a spread of Treasuries plus 205 bps on Thursday.

"They tightened and widened again the last couple of days," one source said.

The bank and financial services company is based in Charlotte, N.C.

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