Euro bonds of General Motors and Ford fell on Wednesday after Standard & Poor's said it remained "nervous" about the ratings of the two car giants.
S&P analysts, speaking at a briefing in London, laid the foundations for further rating downgrades of the two top US automakers, citing high energy prices, an increased chance of a US recession following Hurricane Katrina, the companies' poor product mix and a decline in sales of sport utility vehicles.
"We are still nervous about our ratings, even at the reduced levels," said Scott Sprinzen, an S&P managing director.
GM and Ford's long bonds had both lost one percentage point on the day by Wednesday afternoon.
"We were in much better shape in the morning," said a bond trader in London.
General Motors' 8.375 percent euro bond due in July 2033 was bid at 81.25 percent of face value.
Its rival Ford Motor Co's 4.875 percent bond due in January 2010 was bid at 93.5 percent of face value.
S&P lowered its ratings on GM and Ford to "junk" status in May, sending shockwaves through the credit markets as complex trading strategies by hedge funds came unstuck.
S&P rates GM at BB, two notches below investment grade, and Ford at BB+, one notch below. Both ratings have negative outlooks, signalling they could fall over the next 18 months.
Credit traders in London focussed in particular on S&P's warning on Wednesday that GM could also be hit if Delphi Corp - a former GM unit and the largest US auto parts supplier - filed for bankruptcy.
Delphi has said it needs help from GM and its unions to cut high wage and benefit costs or it will consider filing for Chapter 11 bankruptcy protection. Its chief executive has also said October 17 changes to US bankruptcy laws would be unfavourable to debtor companies.
"We take very seriously Delphi's threat to file for bankruptcy by October 17," S&P's Sprinzen said. "If Delphi files for bankruptcy, we couldn't rule out a ratings change (for GM)," he said.
Sprinzen cited concerns over potential damage to GM's operations if Delphi filed for bankruptcy, including worries that it could terminate certain unprofitable component supply businesses with GM.
The declines in autos also spooked telecoms investors. Cars and telecoms are the two most liquid sectors in European corporate bond trading, and sometimes trade in tandem with each other.
"The loss is all led by US autos, " said a telecoms trader in London.
Telecom Italia's 5.25 percent euro bond due January 2055, the longest-dated euro corporate bond outstanding, was bid one basis point wider on the day at 169 basis points more than government debt.
Telecom Italia's 7.75 percent euro bonds due January 2033, issued via Olivetti, was bid at 138 basis points more than government debt, compared to a spread of 135 basis points on Wednesday morning before S&P's GM and Ford comments.
The FTSE Euro Corporate Bond Index showed investment-grade corporate bonds in euros yielding an average 38.0 basis points more than similarly-dated government bonds at 1500 GMT, 0.3 basis points more on the day.
In the primary market, General Electric Capital Corporation, the funding arm of US conglomerate General Electric, is scheduled to sell the sterling tranche of a two-part subordinated bond.
Merrill Lynch and UBS are the lead managers. The 750 million pound tranche is due in 2037, and would offer a yield of 70 basis points over UK Gilts, according to a banker.