US CORP BONDS-Spreads push wider on lingering bank worries

NEW YORK, April 7 (Reuters) - U.S. corporate bonds weakened
on Tuesday, led by financial companies on lingering concerns
about how banks will value toxic bond assets and become
profitable.

The U.S. government's ongoing stress tests for banks are
one of the reasons many investors are steering clear of
financial institutions' corporate bonds, said Jamie Cox,
managing partner at financial planning and asset management
company Harris Financial Group in Colonial Heights, Virginia.

The main index of investment-grade credit default swaps
widened to about 194 basis points from about 189 basis points
late on Monday, according to data from Markit Intraday.

Citigroup's 6.5 percent notes due in 2013 weakened with
spreads widening 2 basis points on Tuesday to 701 basis points
over Treasuries, MarketAxess data showed.

Cox said he has been purchasing industrial companies' high
yield bonds for his clients who are mostly retirees over the
past few months.

"It's safer to have a high-yield bond than the equity of
the same company," Cox said. "I prefer to be higher up the food
chain."

U.S. investment-grade corporate bond yields climbed to a
record 656 basis points over Treasuries in December, before a
rally in corporate debt stalled in February. Those spreads have
fallen to about 578 basis points on Monday, according to
Merrill Lynch data.

Bonds of General Motors Corp GM.N initially fell and then
traded mixed, after Reuters reported that GM is in "intense"
and "earnest" preparations for a possible bankruptcy filing, a
source familiar with the company's plans told Reuters on
Tuesday. For details, click [ID:nN07463416]

A plan to split the corporation into a "new" company made
up of the most successful units, and an "old" one of its
less-profitable units, is gaining momentum and is seen as the
most sensible configuration, said another source familiar with
the talks.

The sources requested anonymity because they were not
authorized to speak on the record.

GM bonds were mixed in afternoon trading, with GM's
benchmark 8.375 percent note up less than 1 cent on the dollar
to 11.75 cents, yielding more than 70 percent, versus about 11
cents with a 75 percent yield on Monday, according to
MarketAxess data. The bond had slipped in earlier trading.

Two other GM notes were slightly lower in late afternoon
trading.

"We're getting little drabs here and there, but there's
nothing definitive to make any investment decisions," said Ken
Karwowski, a high-yield portfolio manager at Allegiant Asset
Management in Chicago who is "underweight" auto debt.
(Additional reporting by John Parry, Chelsea Emery and
Soyoung Kim; Editing by Diane Craft)