US corporate bonds: financials sell off, homebuilders cut

US corporate bond spreads widened on Friday, led by weakness in the financial sector after Deutsche Bank said large banks may post more than $10 billion of write-downs in the fourth quarter.
Spreads on Citigroup's 10-year notes widened more than 10 basis points, while Merrill Lynch's 10-year note spreads widened by 27 basis points, according to MarketAxess. Deutsche Bank said most of the $10 billion of write-downs would come from Merrill and Citigroup.
"The bottom line in all of is that people don't know how much bad stuff is still on banks' books," said Scott MacDonald, director of research for Aladdin Capital in Stamford, Connecticut. "Until that gets resolved, until you have a little more transparency and disclosure, then I think the market's going to maintain a certain sense of nervousness over it."
The main index of investment-grade credit default swaps widened by nearly 3 basis points to about 70.3 basis points, according to Markit Intraday. Merrill's credibility also took a big hit after reports said the biggest brokerage sought to delay billions of dollars on losses of troubled assets by moving them to hedge funds.
Merrill's credit default swaps widened to about 127.5 basis points, or $127,500 a year for five years to protect $10 million of debt, out from 98 basis points on Thursday, according to a strategist.
Merrill's credit default swaps have been trading as though they were in junk territory, or about six levels below their current ratings of "A1," according to the market-implied ratings compiled by Moody's Investors Service.
Citigroup's credit default swaps have been trading about eight levels below their "Aa1," rating, or in the "Baa3" category, which is one notch above junk status.
"Normally a big rating gap implies a greater probability of a rating downgrade going forward, said David Munves, head of credit strategy for Moody's in New York. "The market has a significantly more negative view than Moody's. Also weighing on the credit market was a spate of five downgrades to US homebuilders by Standard & Poor's, with three companies going to junk territory. The downgrades reflect weak earnings and deteriorating conditions in the housing market, S&P said.
Home builder D.R. Horton's 6.5 percent notes due in 2016 fell to 89.625 cents on the dollar, down from 91.5 cents on October 29, their previous significant trade, according to MarketAxess.