NEW YORK, April 14 (Reuters) - A month-long rally in U.S.
corporate bonds sputtered on Tuesday as recent optimism about
bank earnings started to fade and investor anxiety about the
fragility of the financial system resurfaced.
At first, corporate debt extended the previous session's
gains, partly lifted by Goldman Sachs' stronger-than-expected
earnings and plan to sell stock to repay bailout funds to the
government. The gains seemingly indicated "some degree of
cautious optimism about banks," said Scott MacDonald, head of
research at Aladdin Capital in Stamford, Connecticut.
However, "banks still have a lot of toxic assets on their
books," MacDonald added. "There is no waving of a magic wand to
make that go away."
The longer-term question haunting financial markets is how
much the worst recession in decades will add to the trillions
of dollars of financial institutions' losses from the global
financial crisis. Despite huge government rescue efforts,
another mountain of write-downs could curb bank lending and
sink the already struggling economy.
Costs to insure corporate debt against the risk of default
rose on Tuesday. The main index of investment-grade credit
default swaps widened about 4.5 basis points to 177.5 basis
points from late Monday, according to data from Markit
Intraday.
"The market doesn't want to get disappointed by a one-off
earnings spike by banks. That is the fear," said William
Larkin, portfolio manager with Cabot Money Management in
Boston.
"Now the question is whether the bank business model and
market environment is sustainable," he added.
Corporate bond spreads over Treasuries have been on a
tightening trend for four weeks, including more than 20 basis
points of narrowing in April alone. As of Monday, high-grade
corporate bonds yielded 560 basis points over Treasuries, down
from 586 basis points at the end of March, according to Merrill
Lynch data.
But on Tuesday, yield spreads of some financial entities'
corporate bonds widened slightly, some analysts said.
In the high-yield market, General Motors Corp's (GM.N)
8.375 percent bonds due in 2033 fell to 9.0 cents on the dollar
from 9.44 cents on Monday, according to MarketAxess.
The prospect of GM avoiding bankruptcy is becoming less
likely, two sources close to talks between the U.S. government
and the company said on Tuesday.
(Additional reporting by Walden Siew)
(Reporting by John Parry; Editing by Dan Grebler)
