Fed announcement, Bank of America downgrade hurt tone; B of A, financials widen in trading

By Andrea Heisinger and Cristal Cody

New York, Sept. 21 - Issuers again gave up on pricing any paper Wednesday as the high-grade bond market awaited an announcement from the two-day Federal Reserve meeting.

That announcement came in mid-afternoon and included efforts to boost the economy and reduce borrowing costs through the purchase of Treasury paper. The Fed is planning to buy $400 billion of Treasury securities in varying long-dated maturities by June 2012.

Another move to come out of the Federal Open Market Committee meeting included reinvesting proceeds of current investments into mortgage-backed securities. Both of these announcements sent yields on 10-year Treasury notes plummeting.

This news was offset by Moody's Investors Service downgrading the ratings of Bank of America Corp. from A2 to Baa1.

"The Dow was down 280 at the close, so not exactly the huge positive response we were looking for," a syndicate source said late in the day, referring to the stock market's reaction to the Fed news.

As for issuance Thursday, it's "too soon to tell" if anyone will tap the market, the source said, adding that it depends on where futures are and if the tone rebounds overnight.

A market source echoed those sentiments, saying that "I think if [the tone's] OK at the open we'll see something. It's about who wants to be the first to announce [a deal]."

There was a quasi-sovereign deal from the World Bank priced Wednesday out of Europe. The triple-A rated lender to developing countries priced $300 million of five-year notes. Terms were not available at press time.

The Markit CDX Series 16 North American high-grade index eased 6 basis points to a spread of 140 bps on Wednesday.

"Markets are just getting slaughtered," a bond source said late in the day. "Investment-grade industrials are out 7 [bps] today from flat. The reaction today is definitely negative."

Treasuries soared, sending the benchmark 10-year note yield to a record low and the 30-year bond yield down 21 bps after the Federal Reserve announced the additional monetary policy plans.

The benchmark 10-year Treasury note yield fell to 1.85% from 1.93%. The 30-year Treasury bond yield dropped below 3% to 2.99% from 3.2%.

Financial paper widened in the secondary market on the Fed announcement and after the Moody's ratings cut on Bank of America, Citigroup, Inc. and Wells Fargo & Co.

"Mostly been widening in the financial names," a trader said.

Bank of America's notes widened nearly 40 bps in trading. General Electric Capital Corp.'s notes and Morgan Stanley's paper also ended the day weaker.

Overall trading volume fell about 10% to $11 billion.

Bank of America cheapens

Bank of America's 5% notes due 2021 were seen offered at 409 bps late day.

"This morning, they were offered at 370," the trader said. "That's probably the worst case I've seen."

Only about 10 bps of it could be attributed to lower Treasuries rates, the trader noted.

Bank of America is based in Charlotte, N.C.

GE Capital widens

General Electric Capital's 4.625% notes due 2021 widened about 7 bps in trading.

They were seen at 217 bps late in the day, wider than about 210 bps early morning.

The financing arm of General Electric Co. is based in Fairfield, Conn.

Morgan Stanley weakens

Other financial names such as Morgan Stanley traded wider on the day, a trader said.

Morgan Stanley's 5.5% notes due 2021 were seen going out at 370 bps, 20 bps wider than where they traded on Tuesday.

The financial services company is based in New York City.

CDS costs rise

Credit default swaps costs rose on Wednesday after the Fed announcement and the bank downgrades, indicating less investor confidence in the financial sector, a source said.

Citigroup's CDS costs widened 27 bps to 255 bps bid, 265 bps offered. JPMorgan's CDS costs were 16 bps wider at 146 bps bid, 151 bps offered.

Brokerage CDS costs were higher also. Merrill Lynch's CDS costs widened 30 bps to 415 bps bid, 435 bps offered. Morgan Stanley's CDS costs closed 30 bps wider to 345 bps bid, 355 bps offered. Goldman Sachs' CDS costs were 25 bps wider at 258 bps bid, 268 bps offered.

Paul Deckelman contributed to this report

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