General Motors saw renewed selling of its bonds in Europe on Wednesday as another quarter of disappointing results undermined investor confidence in the troubled US auto maker. Rival Ford, which posted a 19 percent drop in second quarter profits, was downgraded by Fitch Ratings to BBB-, the lowest investment grade.
GM bonds fell by as much as 3 percentage points with the 8.375 percent security due in 2033 trading as low as 82.5 percent of face value, before recovering late in the day.
The cost of credit protection on GM rose as investors looked to insure against default on GM's $105.7 billion of bond debt. Five-year default swaps traded 40 basis points wider at 480 basis points.
"The north American auto results were very, very disappointing," said an analyst in London. "In the rest of the world they did alright but the credit trades on what happens in north America - the outlook for the bonds is still difficult."
GM's core North American automotive business lost more than $1 billion in the second quarter. Excluding one-off items, GM lost 56 cents per share, compared with an average analyst forecast of a 3 cent per share profit, according to Reuters Estimates.
The company rocked the credit markets in March and May when it delivered a profit warning and saw its credit ratings from Standard & Poor's and Fitch Ratings fall to "junk" status.
Ford, which on Tuesday reported steep losses in its north American division, saw its credit rating cut by Fitch to BBB-, the very bottom of investment grade, on Wednesday, as the rating agency worried over negative cash flow. The rating has a negative outlook.
Ford beat analysts expectations in the second quarter, but warned it expected its global car business to post a loss this year.
Five-year credit default swaps on Ford Motor Credit traded bid at 420 basis points following news of the downgrade, around 10 basis points wider on the day.
The FTSE Euro Corporate Bond Index showed investment-grade corporate bonds in euros yielding an average 36.4 basis points more than similarly-dated government bonds at 1538 GMT, 0.3 basis points more on the day.
Telecoms bonds were largely unchanged in late trading, although there were signs of weakness in long-dated issues, particularly the 30-year sector, a trader said.
"That's a combination of GM and some profit taking - we've had a strong month or so," he said. "And Greenspan's comments certainly don't give any comfort to those who expect the yield curve to flatten."
Federal Reserve Chairman Alan Greenspan said on Wednesday that the Fed expects to keep raising interest rates and that the US growth outlook was solid.