US corporate bond spreads widened marginally on Friday after a record loss at American International Group Inc, the world's largest insurer, pushed stocks lower. AIG's loss and fresh troubles at a spate of other financial companies this week brought a halt to a long-running rally in corporate bonds.
Average high-grade corporate spreads widened for the first time in 19 sessions on Thursday, while the main high-grade credit default swap index widened about 20 basis points on the week. "I think AIG's numbers threw a lot of cold water on everyone's hopes that we are out of the woods," said Mirko Mikelic, portfolio manager for Fifth Third Asset Management in Grand Rapids, Michigan. "Citi also in its comments talked about trying to sell assets, but it's difficult in this environment to sell the assets that they want to sell."
Citigroup, hit hard by the subprime mortgage meltdown and ensuring turmoil, said on Friday it aims to shed $400 billion of assets over two to three years in a drive to become more efficient. A large loss at home funding company Fannie Mae this week and liquidity concerns at mortgage lender Residential Capital also have weighed on corporate bonds in recent days.
Despite the weaker tone, companies sold more than $33 billion of investment-grade bonds this week, the most since a record $40 billion two weeks ago, according to Thomson Reuters data. "The worst may be behind us as evidenced by improving borrowing conditions and more sales," said Richard Peterson, director of capital markets at Thomson Reuters in New York. "We're seeing willing buyers of paper."
The strong demand for corporate bonds has allowed companies to sell debt without the extra yield premiums over secondary bonds that they offered earlier this year. "Last week was the first week we actually passed on new deals because the new issue concession collapsed," Fifth Third's Mikelic said. "That tells you there's a lot of cash on the sidelines, and a lot of people eager to buy and put money to work. But there's still more write-downs and issues to hammer out in the market," he said.
The cost of protecting AIG's debt against default with credit default swaps rose to 117.5 basis points, or $117,500 a year a year to protect $10 million of debt, up from 112 basis points on Thursday, according to data from Markit Intraday. AIG posted a $7.81 billion first quarter net loss after writing down assets linked to subprime mortgages.
The main index of investment-grade credit default swaps widened to 104.83 basis points on Friday, up from 104.25 basis points on Thursday, according to Markit Intraday. It had closed at about 86 basis points Friday a week ago.