Subprime takes toll on high-grade corporate bonds

NEW YORK (Reuters) - The perceived risk of owning investment-grade corporate bonds rose on Friday by the most since February as worries about the subprime mortgage market took a toll on investors' appetite for risk.

Spreads, the extra yield that investors demand for the risk of holding investment-grade corporate bonds, widened by 3 basis points on average on Friday to 108 basis points, according to Merrill Lynch data.

That was the biggest move since February 27, when Chinese stocks sold off sharply, hurting risk appetite worldwide and causing high-grade corporate spreads to widen by 3 basis points.

Average yields on investment-grade corporate bonds ended on Friday at their widest level since May 2005, when the downgrades of Ford Motor Co. (F.N: Quote, Profile, Research, Stock Buzz) and General Motors Corp. (GM.N: Quote, Profile, Research, Stock Buzz) to junk status jarred the debt markets and curbed investor appetite for risk.

Risk aversion has spread from the junk bond market to higher-rated corporate bonds as rating agencies downgraded hundreds of bonds tied to subprime loans. Losses at two Bear Stearns BSC.N hedge funds exposed to subprime mortgages have also touched off worries about broader fallout.

Further weighing on sentiment, Bear Stearns said last week that the two hedge funds had "very little value" left.