US corporate bond yield spreads finished firm on Friday despite an active week of supply, while bonds of Cardinal Health suffered significant widening after a ratings downgrade, traders said.
Yield spreads on Cardinal Health bonds traded as much as 0.26 percentage point wider on Friday, traders said.
"Cardinal Health bonds were hammered today," said one trader. "Concerns the ratings may get cut to junk weighed on those spreads today."
Triggering the sell-off was a downgrade by Moody's Investors Service to Cardinal Health's senior unsecured notes late Thursday. Moody's cut the firm's debt to 'Baa3' from 'Baa2,' its lowest investment grade rating, and warned ratings could fall further.
The rating action came after Cardinal Health said it would delay filing its annual 10K form with the Securities and Exchange Commission and warned that financial statements for fiscal 2001, 2002 and 2003 and the first three quarters of 2004 should no longer be relied upon.
A downgrade in credit ratings drives the cost of borrowing higher for a company. It may also trigger some portfolio managers who are only permitted to hold investment-grade bonds to unload the debt if it is slashed to junk grade.
The drug wholesaler's 4 percent bonds due 2015 widened 0.26 percentage point on Friday to trade at 1.36 percentage points over US Treasuries, traders said. Its 6.75 percent issue due 2011 moved out by 0.20 percentage point to trade at 1.06 percentage points over Treasuries.
Among other active issues on Friday, bonds of automakers narrowed after Ford Motor Co raised its profit forecast and set plans to cut 1,150 jobs at its main Jaguar plant in Britain.
Ford Motor Credit Co's 7 percent notes due 2013, often used as a benchmark, tightened 0.06 percentage point on Friday to 2.02 percentage points over Treasuries, MarketAxess reported. Ford Credit is a unit of Ford Motor Co General Motors Corp's 8.375 percent bonds due 2033 narrowed by 0.11 percentage point to 2.8 percentage points over Treasuries in late session trade, MarketAxess reported.
Meanwhile, investors digested some $15 billion of new sales this week as Treasury yields declined and appetite grew for higher-yielding asset classes. Despite the recent volume, secondary spreads have held in, traders said.
Issuers have sold about $35 billion of debt in the first half of September, surpassing initial estimates for a monthly volume of that size.
Market experts have now revised September estimates for investment-grade issuance to $50 billion.
Market players are focusing on Federal Reserve policymakers who are widely expected to raise the federal funds rate at a policy meeting on Tuesday despite recent mixed economic news.
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