UPDATE 1-US CORP BONDS-Spreads push wider after record best day

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NEW YORK, Oct 15 (Reuters) - U.S. corporate bond spreads edged wider on Wednesday as stocks fell, a day after a massive government rescue plan for banks triggered the best single-day performance on record for corporate debt.

Overall spreads were broadly wider, traders said, after yield spreads on high-grade bonds had narrowed by a record 33 basis points on Tuesday to 549 basis points, according to Merrill Lynch data. The U.S. government said on Tuesday it was pumping $250 billion into major banks, spurring the brief rally in another day of volatile trading.

The Dow Jones industrial average .DJI has posted 100-points or more swings in 20 of the last 23 sessions.

The record move tighter came just days after corporate bonds had widened by the most on record, or 46 basis points, on Friday, in the wake of a panic-driven sell-off in stocks. Spreads also hit an all-time high of 581 basis points on Friday, according to Merrill Lynch data dating to Dec. 31, 1996.

"The overall market and retailer names are all wider on pessimism over credit markets," one trader said.

Credit default swaps on U.S. retailers widened on Wednesday after the Commerce Department said U.S. retail sales dropped by the most in more than three years in September.

Nordstrom's (JWN.N) five-year swaps rose by about 56 basis points to about 358 basis points, or $358,000 a year to insure $10 million of debt, according to data from Markit Intraday.

Saks'(SKS.N) five-year credit default swaps rose to 18.5 percent upfront, or $1.85 million to insure $10 million of debt, from 17.8 percent upfront on Tuesday, while Dillard's (DDS.N) rose to 20.5 percent upfront from 18.3 percent. The upfront swaps also require annual premiums of $500,000.

Credit default swaps on U.S. banks weakened on Wednesday, reversing some gains made earlier in the week, as concerns about a global recession weighed on the equity and credit markets.

Morgan Stanley (MS.N) and Goldman Sachs (GS.N) were among the weaker performers after the American Bankers Association erroneously reported the banks would not be eligible to participate in a Federal Deposit Insurance Corp program to guarantee unsecured bank debt. [ID:nN15326991]

OVERWEIGHT

Recent selling of corporate bonds may present some investing opportunities, according to Bank of America.

Encouraged by worldwide government moves to shore up banking systems, Bank of America said investors should "overweight" U.S. corporate bonds, changing from its previous "marketweight" recommendation.

An overweight call means Bank of America expects corporate bonds may outperform their benchmark indexes while a marketweight call means they will perform in line with those benchmarks.

Nearly 70 percent of U.S. banking system liabilities now benefit from some form of government support, Bank of America estimated in a new report. "Credit risks for the remaining brokers and for the big names in the banking sector have now bottomed," the bank said, also moving those sectors to overweight from marketweight.