Primary market bleak despite bailout bill; Wachovia, Wells Fargo move on buyout news, Citi unmoved

By Andrea Heisinger

New York, Oct. 3 - Passage of the U.S. financial bailout bill by Congress and the president's quick move to sign the bill into law did little to immediately ease the worries in the investment-grade bond market Friday.

Employment figures for September also were released and confirmed for some that the country is, in fact, in a recession. A virtual credit freeze has also contributed worries, sources said, and caused the state of California to ask the Treasury for $7 billion.

The secondary was focused on movements in the bonds of Wachovia Corp., Wells Fargo & Co. and Citigroup, Inc. after a surprise move by Wachovia to switch to a new suitor, Wells Fargo, instead of Citigroup. Both Wachovia and Wells Fargo bonds moved in response, while Citigroup's had little reaction.

White House approves bailout

Some tensions were eased Friday after president George W. Bush signed the $700 billion financial bailout bill late in the afternoon after the U.S. House of Representatives passed it.

It was still unclear at the market close how this would affect the coming week's issuance, a source said.

"It was definitely considered a good thing," he said of the bill's passage. "But with the [employment] numbers and credit, it's hard to say. The market needs a couple of good days."

As of Thursday night, the investment-grade market was wary of the House passing the bill, which failed at the beginning of the week and sent the markets into a downward spiral.

The tone recovered enough for a smattering of issues to price Wednesday and Thursday. It's unclear when the next issuance window will open.

"It's bleak," a source said when asked how the market looked late Friday. "It traded up heading in to the House vote, but then it started to focus on the financial situation, which was very bleak."

Also throwing some for a loop Friday was the news that Wachovia changed course and entered into a deal for the entire company to be sold to Wells Fargo for about $15 billion in stock.

In a government-brokered deal earlier this week, Citigroup was to buy the banking portion of Wachovia and absorb most of its mortgage-related losses. The FDIC would have taken on the rest.

"That was kind of crazy," a source said of the new Wachovia, Wells Fargo partnership. "Everyone kind of thought that was a done deal."

It's unclear whether the new buyout deal will go through, as Wachovia shareholders and federal regulators need to sign off on it.

The deal caused increased trading of both Wachovia and Wells Fargo bonds.

Employment figures for September were released Friday by the Bureau of Labor Statistics, which said 159,000 jobs were lost in that month. This was twice the amount of the two months prior.

"Everyone was expecting the numbers to be bad, and they were," a source said.

Coming week 'bleak'

A slight bump in market tone prior to the House passage of the $700 billion rescue bill Friday didn't last long, with a market source calling the tone "weak" after the market close.

When asked about issuance for the coming week, a source said that the worsening credit problems, unemployment data and other factors don't make the market enticing.

There will be "very limited issuance," a source said about the coming week. Worsening market conditions will add to the large backlog of issues building since late August.

"It's ugly out there," a source said.

Week sees $2 billion

Rocky market conditions left the week with about $2.05 billion in new issues from a handful of names.

Issuance was centered on industrial and utility names, including Apache Corp., Wisconsin Power & Light Co., Interstate Power & Light Co. and Union Pacific Corp.

Union Pacific tightens

Bonds issued Thursday by Union Pacific were seen tightening in secondary trading Friday afternoon, a source said.

The 7.875% notes due 2019 were at 394 basis points bid, 388 bps offered, in from pricing at Treasuries plus 425 bps.

Financials move on merger

Wells Fargo, Citigroup and Wachovia were seen moving to various degrees Friday on developments with buyout plans.

A planned buyout of Wachovia's banking operations by Citigroup is apparently off, after a deal for the entire company was offered by Wells Fargo.

This left Wells Fargo bonds about 10 bps wider and Wachovia about 15 bps higher, a source said.

Citigroup bonds were seen unchanged to weaker.

Wachovia tops trading

Wachovia's 5.5% bonds due 2013 were seen at the top of the investment-grade trading volume Friday afternoon, after the morning's announcement of the switch in buyout partner.

Wells Fargo's 4.375% notes due 2013 were also seen toward the top of the trading list.

Two General Electric Capital Corp. bonds were seen toward the top after the $3 billion investment by Warren Buffett's Berkshire Hathaway.

GE's 6% notes due 2012 and 5.625% bonds due 2018 were being traded heavily.

Bank, broker CDS mixed

Bank credit-default swaps were seen between 115 bps tighter to 50 bps wider Friday, a trader said.

Citigroup was about 50 bps wider, at 340 bps bid, 360 bps offered.

Wachovia was 115 bps tighter at 220 bps bid, 270 bps offered on news of the Wells Fargo buyout.

Wells Fargo was about 10 bps wider at 160 bps bid, 180 bps offered.

Broker CDS were less varied, the trader said.

Goldman Sachs was about 15 bps tighter, while Merrill Lynch was about 5 bps wider.

Morgan Stanley's upfront costs were about 1.5 percentage points tighter. They were seen between 13.5% and 15.5%, plus 500 bps annually, the trader said.

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