The US corporate bond market worsened on Friday as investors continued to fret over further potential losses at Wall Street banks and brokers hurt by risky mortgage investments.
"It's just ugly. Nobody wants to provide any bids, and the bid/ask spread is outrageous," said Mirko Mikelic, portfolio manager at Fifth Third Asset Management, referring to a widening gap between prices offered by buyers and sellers.
The spread, or extra premium investors demand to buy investment-grade corporate bonds, widened by at least 2 basis points on Friday, with the junk market faring worse. Debt issued by US financial firms led the market down, with Bear Stearns' 6.4 percent notes due in 2017 widening 17 basis points to 286 basis points over US Treasuries, according to MarketAxess.
Credit protection costs on US investment banks and bond insurers rose as Wachovia Corp reported losses stemming from subprime mortgage related debt. Barclays Plc, meanwhile, rebuffed speculation that it might have a $10 billion write-down.
Prices in the US high-yield market were also down amid heavy trading flows, according to Justin Monteith, an analyst at KDP Investment Advisors in Montpelier, Vermont. "Our index has cracked the 400 basis point mark for the first time since the end of July," Monteith said in a note to clients. "Postponements of new high-yield deals are likely given current market conditions."
Some bonds of bankrupt auto parts maker Delphi Corp plunged after the company said a US bankruptcy court agreed to delay a hearing until November 29 to consider changes to its reorganisation plan. Average spreads on US junk bonds closed on Thursday at levels already wider than they've been for at least two years, according to Merrill Lynch data.
Trading in the US dollar-denominated fixed-income market was scheduled to close at 2 pm in observance of the Veterans Day Holiday and will be closed on Monday at the recommendation of the Securities Industry and Financial Markets Association. Meanwhile, in current market conditions, it is also becoming tough to sell high-grade corporate bonds in the secondary market, Mikelic said.
"The word 'pass,' I'm seeing that a lot," Mikelic said. "If you can name the 6 top investment banks with huge balance sheets, they're the ones that are passing." "They're basically being told, only at distressed levels, buy bonds," Mikelic said. "I think after Thanksgiving, the market's pretty much just shut down.
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