The market for investment-grade corporate bonds slumped on Friday as investors spooked by troubles roiling the subprime home loan sector largely boycotted company debt. US junk bonds also plummeted during the session, with some benchmark bonds falling to their lows for the year, causing a broad repricing of risk.
"There are no buyers," one corporate bond trader said. "The market's just scared. The subprime fallout is just too intense." The negative market sentiment pushed General Motors Corp's 8.375 percent bonds due in 2033 down more than 2 cents to 86.75 cents on the dollar, which would be a low for the year, according to MarketAxess.
A surge in defaults on risky mortgage loans granted to less creditworthy borrowers has prompted Wall Street's credit rating agencies in recent weeks to downgrade hundreds of bonds tied to these loans, rattling financial markets.
Spectacular losses at two Bear Stearns hedge funds exposed to subprime mortgages have sparked worries of broader risk, with fears escalating on Tuesday when Bear said the funds had "very little value." "We've just been bombarded every day with bad news," the trader said. "When they announced that those two funds were worthless, it just sent everybody into a tailspin."
"Time needs to go by without a headline," the trader added. "We haven't had that opportunity" to stabilise. US credit derivative indexes reached record wides on Friday on investor wariness about mortgages and some disappointing company earnings.
The benchmark investment grade credit derivative index earlier traded at a wide of 53 basis points, three basis points wider than Thursday's close, before retracing to around 52.5 basis points.
Average junk bond spreads have widened 39 basis points over US Treasuries since June 1, as of Thursday, Merrill Lynch data shows. Junk spreads widened even further on Friday. The downturn in the junk bond market has dried up sales of new bond sales, with just a handful of deals pricing in July.
"Whereas before the market was awash with liquidity, the market is now trying to find buyers," said Kingman Penniman, president of high-yield research firm KDP Investment Advisors in Montpelier, Vermont.