US corporate bond issuance will revive-BofA Merrill

NEW YORK, June 28 (Reuters) - U.S. corporate bond issuance, which dried up in May as the market was buffeted by Europe's sovereign debt crisis, will soon recover as that upheaval slowly abates, Bank of America Merrill Lynch said on Monday.

The bank is sticking to its previous forecasts that there will be $800 billion of U.S. high-grade corporate bond issuance and $180 billion of high-yield issuance for 2010.

Issuers who refrained from selling corporate bonds in May, will return to the debt markets in coming months, said Jeffrey Rosenberg, head of global credit strategy with Bank of America Merrill Lynch Global Research.

He was speaking at a news conference to talk about the outlook for the economy and markets for the second half of 2010.

Landmark financial regulation, which is headed toward final congressional approval this week, will reduce the extent of risk-taking by financial institutions, supporting gains in bank bonds, he said.

"In reducing the risk you end up reducing the credit spreads," Rosenberg said.

U.S. investment grade corporate bond spreads over Treasuries widened between late April and mid-June by more than 60 basis points on worries about the turbulence in European debt markets and uncertainty about the impact of the U.S. financial reform bill on banks, analysts said.

When spreads widen it shows investors are demanding higher compensation for the additional risk of holding corporate bonds, as opposed to safe haven Treasuries.

But spreads should now narrow as both main stress factors for the corporate bond market are now past their extremes, Rosenberg said.

"We think we are at the height of uncertainty about what could be in the bill," he said.

In the second half of the year, as sovereign risks also stabilize or ebb, U.S. corporate bond spreads should tighten, Rosenberg said.

Partly because the Federal Reserve has provided cheap dollar funding for the European financial system via dollar swap lines, funding pressures on European banks have been easing since the end of May, he said.

The benchmark 10-year Treasury note's yield, which slid to about 3.03 percent earlier on Monday, the lowest in about 14 months, is likely to rebound to 3.75 percent by the end of this year, as U.S. economic data indicate the economy will avoid a double dip recession, the bank's strategists expect. (Reporting by John Parry; Editing by Andrew Hay)