UPDATE 2-US credit default swaps, bond market "falling apart"
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NEW YORK, Nov 20 (Reuters) - U.S. credit default swaps widened to record levels on Thursday that suggest investors anticipate the worst period of investment-grade corporate bond defaults since at least 1980, according to analysts.
The main investment-grade credit default swap index widened by 22 basis points to 267 basis points, according to data from Markit Intraday. It had hit a record 275 basis points earlier on Thursday.
Concerns about the ailing commercial real estate market, fears of rising defaults and mounting troubles at U.S. automakers were weighing on investors' appetite for risk, strategists said.
In cash bonds, the corporate bond market was "falling apart" with spreads gapping wider, a trader said.
New issues, which were performing well earlier this month, deteriorated on Thursday. An issue of 10-year notes from Verizon Communications (VZ.N), for example, widened by 34 basis points to 581 basis points over Treasuries, according to MarketAxess. It was issued at 487.5 basis points over Treasuries on Oct. 30.
Investors had become so pessimistic that credit default swaps were pricing in a cumulative 14 percent default rate for investment-grade bonds over the next five years, JPMorgan said on Thursday.
Since 1980, the worst five-year period for investment-grade defaults was 1987-1992, when the cumulative five-year rate was 2.5 percent, JPMorgan said in a report.
The wide spreads reflect "significant liquidity risk," as fundamentally, many high-grade bonds are benefiting from government support, JPMorgan said. In addition, the deleveraging that has been weighing on the corporate bond market is well advanced and could be nearing an end.
"Still, high-grade bonds will be affected by the negative sentiment and unfavorable spread comparisons to other fixed-income markets," the bank said. With other asset classes selling off sharply, investment-grade corporate bond spreads may have to widen to make yields more attractive again in the near term, it said.
Spreads on investment-grade bonds closed on Wednesday at 606 basis points over Treasuries, just 12 basis points shy of a record 618 basis points hit on Oct. 29, according to data from Merrill Lynch.
The high-yield credit default swap index is reflecting a 55 percent five-year cumulative default rate, JPMorgan said. The index widened by 40 basis points on Wednesday to a record 1,387 basis points, or a $74.63 price, the bank said.
The high-yield index weakened further on Thursday to $73.06, according to data from Markit Intraday. (Reporting by Dena Aubin; Editing by Tom Hals)
