US corporate bond spreads were mostly wider on Friday, though credit default swaps managed to tighten as the financial sector continued to benefit from government rescue efforts. The main index of investment-grade credit default swaps tightened to 194 basis points, about 2 basis points tighter on the day, according to Markit Intraday.
High-yield bonds were also higher, led by improvement in automakers' bonds amid talk of merger discussions in the industry, according to Christopher Munck, a high-yield bond trader at B. Riley & Co in Los Angeles. Private equity firm Cerberus was in talks to sell all or part of Chrysler LLC's operations to General Motors and Renault, people familiar with the talks said. Cerberus's talks with GM also have included the possibility of Chrysler buying GM's remaining 49 percent share of finance firm GMAC.
GMAC's 8 percent notes due in 2031 rose to 33 cents on the dollar, up 4 cents on the day, according to MarketAxess. GM's 8.375 percent bonds due in 2033 rose to 23 cents on the dollar, up 1.5 cents. Despite some improvement earlier in the week, both high-grade and high-yield bond spreads remain at or near record wide levels as investors price in recession fears and increasing risk of defaults.
High-grade spreads closed on Thursday at 573 basis points, just shy of a record 582 basis points on Monday, while high-yield bond spreads closed on Thursday at fresh record high of 1,572 basis points, according to Merrill Lynch data.
Those spreads mean the high-yield market is now pricing in a 16.6 percent default rate, which would top the previous peak rate of 15 percent during the Great Depression, according to Christopher Garman, editor of high-yield research publication Leverage World. "We're looking for a sharp recession rather than a Depression," said Garman, which would mean a default rate closer to 10 percent.
"But you simply cannot rule out what the market is saying," said Garman. "The longer the credit crunch drags on, the more likely it is we will see these very high default rates." In the high-grade market, the cost of protecting bond insurers' debt against default fell following reports that the insurers plan to ask the US Treasury for permission to sell troubled assets to the government.
Ambac Assurance Corp's five-year credit default swaps fell to 33.5 percent upfront, or $3.35 million a year to protect $10 million of debt, down from 38.5 percent upfront late on Thursday, according to data from CMA DataVision. The credit default swaps also require $500,000 a year in annual premiums.
MBIA Insurance Corp's five-year credit default swaps fell to 34.25 percent upfront from 39 percent, plus $500,000 annually. Ambac Assurance is the insurance arm of Ambac Financial Group, while MBIA Insurance Corp is the insurance arm of MBIA Inc.
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