US credit spreads narrowed as President George W. Bush announced $17.4 billion in emergency loans to struggling US automakers on Friday to help avoid an industry collapse and contagion to the broader economy. Demand for corporate bonds already had surged this week on the Federal Reserve's surprise cut of benchmark interest rates to near zero on Tuesday.
Bush's moves signalled the US government would take steps to avoid potential bankruptcies of US automakers, which would have been another blow to an economy already in a yearlong recession. The cost of insuring US corporate debt with credit default swaps fell on Friday, with the main index of investment-grade credit default swaps narrowing to about 212 basis points from 222 basis points on Thursday, according to data from Market Intraday.
The White House on Friday added that it would make available to automakers loans from a bank rescue plan, with $13.4 billion to be given out in December and January. "The US auto market bailout is helping," said Mirko Mikelic, a portfolio manager at Fifth Third Asset Management in Grand Rapids, Michigan. "It's a bit of positive news, but there's fairly light trading."
Bonds of automakers and their finance arms gained on the news. Bonds of GMAC LLC rose sharply, with GMAC's 5.85 percent notes due in 2009 climbing to 90.5 cents on the dollar, up 10.5 cents on the day, according to MarketAxess. GM's 8.375 percent bonds due in 2033 rose to 15.75 cents on the dollar, up from 15.5 cents on Thursday. Ford Motor Co's 7.45 percent bonds due in 2031 rose to 25.5 cents, up from 25 cents.
Nevertheless, GM and Chrysler have until March 31 to cut their debt and reorganise their businesses to meet government mandates, or they still face the prospect of bankruptcy. Fitch Ratings on Friday cut its rating on General Motors Corp to "C," the last step above default, saying the threat of a bankruptcy remains after the government announced the automaker rescue plan.
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