Lehman's credit default swaps widen 17 bps

NEW YORK (Reuters) - The cost of protecting Lehman Brothers' debt with credit default swaps rose early on Wednesday after the Wall Street Journal reported the company is seeking to raise capital overseas.

Five-year credit default swaps on Lehman Brothers widened by about 17 basis points to 275 basis points, or $275,000 a year for five years to protect $10 million of debt, according to data from Phoenix Partners Group.

Lehman Brothers' bond spreads widened about 10 basis points overall, according to traders and investors, though it was difficult to pinpoint exact levels because volumes were thin as investors looked to exit the name.

Among the few reported trades, Lehman Brothers' 4.5 percent notes due in 2010 traded at 340 basis points on Wednesday, out from 330 basis points on May 29, their previous significant trade, according to MarketAxess.

In a sign of the illiquid market, the spread between bids and offers was about 40 basis points on some Lehman Brothers' bonds, versus about 10 basis points for most financial companies, one trader said.

Lehman's shares had tumbled to nearly a five-year low on Tuesday on concern that Wall Street's smallest surviving major brokerage may need to raise more capital, but shares rose on Wednesday after news that Loomis Sayles was buying Lehman bonds.

Lehman has already cut thousands of jobs and raised $4 billion to cushion the impact of previous write-downs.

Still, Lehman Brothers' bonds would be trading much weaker if investors had serious worries about the investment bank's survival, said Mirko Mikelic, portfolio manager for Fifth Third Asset Management in Grand Rapids, Michigan.

"I think Lehman should be able to raise capital and the big thing is the (Federal Reserve) has indicated they are the backstop for the financial system," Mikelic said. "They're not going to allow Lehman to go under ... Most investors know that."

(Reporting by Dena Aubin; Editing by Theodore d'Afflisio)