NEW YORK, March 6 (Reuters) - Spreads on U.S. corporate bonds on Thursday approached their widest levels since the bankruptcy wave of 2002 on worries about hedge fund selling of a wide range of corporate, mortgage and municipal bonds.
Spreads, the extra yields that corporate bonds pay over US Treasuries, gapped out across the board, though banks and brokers were especially hard hit on fears of more writedowns as mortgage problems spread.
“Basically the gears of capitalism are pretty much grinding to a halt,” said Mirko Mikelic, portfolio manager for Fifth Third Asset Management in Grand Rapids, Michigan. “What started as a little subprime problem has kind of morphed into a bigger problem for the bigger economy.”
Average investment-grade spreads had closed on Wednesday at 264 basis points over Treasuries, just 8 basis points shy of a record set on Oct. 10, 2002, a year of massive bankruptcies, according to Merrill Lynch data going back to December 1996. Thursday’s widening was likely to put the index at or close to a new record, analysts said.
In the credit default swap market, the main investment-grade index rose about 19 basis points to a new record wide of about 184 basis points, while swaps on brokers’ bonds rose about 30 basis points, an analyst said.
“All the financial issues of last summer, of the September period, are definitely back in full force,” one corporate bond analyst said. “This is probably the worst the market’s been.”
HEDGE FUND SELLING BLAMED
Credit default swaps on Lehman Brothers'LEH.N debt traded near 300 basis points, or $300,000 a year for five years to protect $10 million of debt, while Goldman Sachs'GS.N swaps were around 215 basis points, the analyst said.
“What’s driving it is this massive deleveraging that’s going on within some of the hedge funds and the mortgage bond funds,” said Dan Sheppard, a director at Deutsche Bank Private Wealth Management in New York. “They can’t make margin calls and so they’re basically selling just about anything they can their hands on.”
Squeezed by losses on mortgage-related debt, hedge funds have been getting calls for increased collateral from bank lenders, forcing them to sell assets into illiquid markets.
On Thursday, an affiliate of private equity firm Carlyle Group [CYL.UL] said it had received margin calls totaling more than $37 million and was given a notice of default after it was unable to meet all the calls. Jumbo mortgage lender Thornburg Mortgage IncTMA.N also said it had failed to meet a $28 million margin call from JPMorgan Chase & CoJPM.N, triggering a default.
“The key problem here is just zero liquidity out there,” said Fifth Third’s Mikelic. “Investment banks are not wanting to provide any liquidity across the board -- not in muni market, not in the mortgage market, not in the corporate market.”
Also fueling market jitters was disappointment that a capital-raising plan announced by bond insurer Ambac Financial Group ABK.N on Wednesday would not preserve its top ratings over time.
SUPPLY BACKLOG A CONCERN
Adding to pressure on spreads is a growing backlog of bond supply as companies wait for stable markets to sell debt. Bank of America has estimated that as much as $100 billion in corporate bonds could be sold in March after a lull in issuance last month.
“That’s a big reason people don’t want to buy financial bonds,” said an analyst. “They’re worried that once things calm down, there’s all this supply that’s going to come to market.”
Though some debt sales managed to find buyers this week, it was at much wider spreads than originally expected. Kansas City Power & Light, a unit of Great Plains Energy IncGXP.N had to offer yields of 275 basis points over Treasuries to sell $350 million of 10-year notes on Thursday, about 75 basis points more than market participants first expected, an investor said.
Recent new issues have also performed poorly, making investors are even more shy of shelling out money for new deals.
“I would imagine you have to be a pretty squeaky clean industrial (company) to get done today,” said Deutsche Bank’s Sheppard.
Additional reporting by Karen Brettell
Our Standards: The Thomson Reuters Trust Principles.