Auto bonds rally on Ford results, Lehman rule

European corporate bonds rose in value on Tuesday, as spreads on auto bonds tightened after Ford Motor Co affirmed a 2006 profit target and Lehman Brothers changed the rules of a bond index. The FTSE Euro Corporate Bond Index showed investment-grade corporate bonds in euros yielding an average 47.2 basis points more than similarly dated government bonds at 1601 GMT, 1.4 basis points less on the day. "It's the Lehman index change and the not-so-rubbish outlook for Ford," a bond trader in London said.
Investment bank Lehman Brothers' changed its corporate bond index rules to include ratings from Fitch Ratings.
Under the new rules, if only one of the three major ratings agencies - Moody's Investors Service, Standard & Poor's and Fitch - were to cut a company to "junk" status, it would remain in the investment-grade index based on the ratings from the other two.
Ford Motor Co, the second-largest US auto-maker, said it was still on track to meet its goal of posting $7 billion in annual pre-tax profit by 2006, and said it expects profit in its core automotive operations to rise this year.
Ford's 4.875 percent bond due in January 2010 was trading 30 basis points tighter at 1527 GMT bid at 225 basis points over Bunds, a trader said.
Its 5.75 percent euro bond due in January 2009 also tightened 20 basis points on the day to 215 basis points over government debt.
However, Ford also said earnings will fall this year due to weaker profit at its financial services unit, which it expects to be hit by rising interest rates.
The $7 billion target is a crucial milestone in the five-year turnaround plan that Ford launched in January 2002, when the industrial icon was teetering on the brink of financial collapse.
"These milestones are coming more or less in line with Moody's expectations. We would therefore expect Moody's and S&P to reassess Ford by mid-year. We continue to favour Ford over GM on a fundamental basis," Dresdner Kleinwort Wasserstein said in a note to clients.
General Motors' 8.375 percent euro bond due in July 2033 traded as much as 25 basis points tighter bid at 389 basis points over government securities.
France Telecom's 8.125 percent bonds due in January 2033 were five basis points tighter at 91 basis points over Bunds by around 1525 GMT, the trader said.