The European corporate bond market took a beating on Tuesday as bonds of General Motors plumbed new lows, although by late in the session traders said there were signs of recovery in some sectors. Short-dated GM bonds came under severe pressure early in the day as investors deserted the credit in droves, with traders saying that some accounts were only now taking the view that a "junk" rating was a real possibility for the world's biggest automaker.
That led spreads across the market wider, although by 1530 GMT there were some signs of a recovery as the market saw value in sectors like telecoms and utilities that are now regarded as oversold.
"Black Tuesday for credit," wrote Suki Mann, credit strategist at SG, in a note to clients.
"Overall though, real money participation remains light, with accounts, though extremely nervous, still preferring to sit on the sidelines."
The market is also waiting for an interest rate decision from the Federal Reserve. The US central bank is widely expected to raise its benchmark federal funds rate a quarter percentage point to 2.75 percent.
By 1530 GMT, GM's 8.375 percent euro bond due 2033 was bid at 545 basis points over Bunds, around 10 basis points wider on the day and 30 basis points tighter than its widest trade on the day.
"The short end got killed this morning," said one trader. At one point, GM paper due in February 2006 - just 11 months away - was offering a higher yield on an asset swap basis than its 2033 bonds, he noted.
Indeed, by late afternoon in Europe, telecoms and utilities bonds were bouncing back, with spreads generally unchanged to five basis points wider on the day, versus earlier trades 10 basis points wider, another trader said.
"In general, we're better, although it still feels very nervous, and there's not much depth to the market," he said.
In the high-yield market, too, buyers were stepping back in after prices dropped two to three percentage points during the morning session, to leave many bonds around 0.5 percentage points lower on the day.
The DJ iTraxx Crossover index, made up of high-yield issuers and credits close to speculative grade, was at 253 basis points, versus around 265 basis points at midday.
The FTSE Euro Corporate Bond Index showed investment-grade corporate bonds in euros yielding an average 57.4 basis points more than similarly dated government bonds at 1603 GMT, 8.0 basis points more on the day.
Some borrowers are still braving the market despite the volatility, even in the high-yield sector.
In investment-grade territory, German automotive and defence group Rheinmetall on Tuesday said it would buy back its 350 million euro 6.125 percent bond due 2006 and issue a new intermediate-maturity euro bond.
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