US corporate bond spreads were broadly tighter on Friday on optimism over a US plan to clean up problem mortgage debt and a temporary US and British ban on short-selling of financial stocks. Bond prices of financial firms rallied, sending yields lower relative to those on government debt after the US government's steps to contain a deepening financial crisis.
Goldman Sachs' 5.35 percent notes due in 2016 rose to 82.3 cents on the dollar from 78.1 cents at Thursday's close, according to MarketAxess. Its yield spreads narrowed by 122 basis points to 487 basis points over Treasuries. The main index of investment-grade credit default swaps tightened to 152 basis points from about 176 on Thursday.
"Everything is getting a huge boost from the government bond plan and temporary ban," one trader said. "Whether it holds will depend on this weekend and become next week's story." A plan for the US government to take on problem debt to help resolve the year-long credit crisis will be discussed over the weekend by Treasury Secretary Henry Paulson, Federal Reserve Chairman Ben Bernanke and members of Congress.
"The Fed is saying they're buying all the bad debt and saying it's clean," said Joseph Mason, a finance professor at Louisiana State University. "Yes, that's helping the market but you're nationalising all the losses. It's a horrible idea."
Mason said the credit crisis has yet to run its course, despite market gains on Friday. "It's a real misnomer to call this a Resolution Trust Corporation plan," Mason said in an interview on Friday. "It's not. RTC was an entity that liquidated highly opaque thrift assets en masse. This plan is the banks selling bad assets to this institution through a voluntary buy-in."
"The natural result will be this institution will hold the absolute worst of the worst, removing any profit potential," he said. Five-year credit default swaps on Morgan Stanley fell to 673 basis points on Friday, or $673,000 a year to protect $10 million of debt, from 856 basis points on Thursday, according to CMA DataVision. Credit default swaps spreads also plummeted for Goldman Sachs, Merrill Lynch & Co, Wachovia, General Electric Capital and Bank of America, CMA said.
Corporate bond spreads had hit new record wide levels over the past week, closing on Thursday at 440 basis points over Treasuries, or more than a full percentage point wider within one week, according to Merrill Lynch data. The average corporate bond now yields more than 7 percent, a level commonly seen on many junk bonds as recently as 15 months ago.
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