US corporate bond spreads mostly unchanged

16 Jan, 2005

US corporate bond spreads mostly ended unchanged to slightly tighter on Friday as General Motors Corp bonds weakened further. Corporate bonds, excluding GM, fared well in light trading during the shortened session, with stocks higher at the early bond close and benchmark US Treasuries lower. The corporate bond market closed at 2 pm EST (1900 GMT) ahead of being closed on Monday in observance of the Martin Luther King Jr. Day holiday.
The bond market's focus remained squarely on the world's biggest automaker, which is one of the biggest corporate bond issuers in the United States.
Corporate bond investors have long braced for GM or Ford Motor Co to slip to junk status.
Heightened concerns about GM this week have fuelled the bid for other high-grade bonds while causing junk bond analysts to puzzle over what impact a GM slide into junk status would have on the high-yield market.
A few analysts said high-grade bonds would benefit from the lost supply, while junk bonds would suffer from the flood of new supply.
An analyst at one firm with close ties to GM said their financial advisers and brokers have been treating GM bonds as junk in an effort to protect clients.
Standard & Poor's on Friday affirmed GM's debt rating. But the rating agency said it is considering changing the company's stable outlook, in what could be a preliminary step toward cutting the world's largest automaker's rating to junk status.
The move came a day after GM said it expects earnings to fall this year as health care costs jump and interest rates crimp profit at its financial arm, General Motors Acceptance Corp.
GM had about $291 billion of debt outstanding as of September 30, 2004. S&P affirmed GM's debt ratings at one notch above junk, or "BBB-minus," citing earnings guidance.
But the longer term is harder to assess, S&P warned. By mid-year, S&P said it will determine whether a stable outlook is appropriate for General Motors and GMAC.
Treasury prices ended the shortened session down. Benchmark 10-year notes were quoted down 15/32 to yield 4.23 percent.
Investors and traders tended to discount a larger-than-expected drop in producer prices while viewing a bigger-than-expected gain in industrial production as more evidence the Federal Reserve will keep hiking rates, analysts said.

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