US CORP BONDS-Tone turns cautious on bank worries

NEW YORK, April 6 (Reuters) - Corporate bond yield spreads
edged slightly wider on Monday on resurgent concerns about the
outlook for banks, though demand for corporate debt issued by
non-financial companies remained solid, analysts said.

After U.S. investment-grade corporate bond yields hit
record wides of about 656 basis points over Treasuries at the
height of the panic in December, corporate debt has rallied.
That spread had fallen to 581 basis points on Friday, according
to Merrill Lynch data.

But most of the rally occurred in a two-month span through
February and has since stalled. The market remains bifurcated.
Most fund managers are wary of financial institutions' debt
unless issued under government guarantee, but are selectively
buying bonds issued by companies with adequate cash reserves
and apparently decent prospects of weathering the worst
recession in many decades.

"In the investment-grade corporate bond market the tone is
cautious," said Mark Pawlak, analyst with Keefe, Bruyette &
Woods. The recent tightening of yield spreads over Treasuries
"has largely been driven by equities' strength," Pawlak said.

But on Monday, U.S. financial stocks fell on an analyst's
warning about rising loan losses at banks and the costs to
insure corporate bonds against the risk of default rose.

The main index of investment-grade credit default swaps
widened to about 189 basis points from about 188.5 basis points
late on Friday, according to data from Markit Intraday.

"Most of the volatility has been around the financial
space," because investors are unsure how effective government
rescue efforts will be in getting tarnished assets off banks'
books, said Tom Murphy, portfolio manager for investment grade
corporate bonds at RiverSource Investments in Minneapolis.

Billionaire investor George Soros told Reuters Financial
Television on Monday that rescuing U.S. banks could turn them
into "zombies", prolonging the already protracted economic
slowdown.

By contrast to financial institutions debt, "the story with
respect to the industrial and utility market is actually pretty
good," said Murphy, who has been concentrating his purchases of
corporate bonds on companies in those sectors with adequate
cash reserves in recent months. For these types of bonds "we
are being paid to wait at current valuations," Murphy said.

The conglomerate Hutchison Whampoa (0013.HK) on Monday sold
$1.5 billion in 10-year notes at 475 basis points over U.S.
Treasuries, said IFR, a Thomson Reuters service. The company is
only the second Asian private corporate issuer to sell debt
overseas this year.

ConAgra Foods Inc (CAG.N) on Monday sold $1 billion notes
in a two-part sale, according to IFR.

(Reporting by John Parry; Editing by Diane Craft)