Liquidity in cash instruments is absolutely dreadful

[makapaaa]

European Two-Year Notes Post Biggest Weekly Gain in Seven Years

By Anchalee Worrachate
Sept. 27 (Bloomberg) -- European two-year government bonds posted the biggest weekly gain in seven years as investors sought the safest assets after negotiations on a U.S. financial-rescue plan faltered.
Investors piled into short-dated debt as lawmakers in the U.S. planned to meet for a second day after talks two days ago ended without an agreement. A group of House Republicans led by Eric Cantor of Virginia said they wouldn't back a plan based on the approach outlined by Treasury Secretary Henry Paulson and supported by President George W. Bush. Bonds also gained after Washington Mutual Inc. was taken over by JPMorgan Chase & Co. in the biggest U.S. bank failure in history.
``The market is reminded once again that this is not a simple piece of legislation,'' Luca Jellinek, a London-based strategist at Royal Bank of Scotland Group Plc, wrote in a note yesterday. ``The news is uniformly friendly'' to the bond market.
The yield on the two-year note slid 18 basis points to 3.66 percent in London, taking its drop this week to 34 basis points, the biggest weekly decline since September 2001, when it lost 37 basis points. The 4 percent note due September 2010 rose 0.34, or 3.4 euros per 1,000-euro ($1,461) face amount, to 100.62.
The yield on the 10-year German bund, the euro region's benchmark government-debt security, fell 7 basis points to 4.16 percent. Yields move inversely to bond prices. The yield dropped 4 basis points from last week.
European notes extended their gains after Republican Senator Richard Shelby suggested in an interview with CNBC that opponents of the Paulson bailout were in no hurry to reach a deal. He said the plan was ``flawed'' and that he was prepared to let markets open next week without a deal.
Yield Spread
The gains pushed the difference in yield, or spread, between two- and 10-year notes to 50 basis points, the widest since April 10, as investors raised bets the financial crisis in the U.S. will crimp economic growth in Europe. The increase was the most since the Sept. 11, 2001, terrorists attacks on the U.S.
European bonds outperformed U.S. Treasuries this quarter on speculation the bailout plan will add to the U.S. government's fiscal burden. Bonds in the euro region handed investors a 2.97 percent return since the end of June, compared with 1.91 percent from their U.S. counterparts, according to Merrill Lynch & Co.'s EMU Direct and Treasury Master indexes.
Demand for government bonds was also boosted as stocks declined and the cost of protecting European corporate bonds from default rose. The Dow Jones Stoxx 600 Index fell 1.9 percent when trading closed yesterday in Europe. Contracts on the Markit iTraxx Crossover Index of 50 companies with mostly high-risk, high-yield credit ratings increased 15 basis points to 590, according to JPMorgan Chase & Co., indicating a deterioration in the perception of credit quality.
Money Markets
The European Central Bank, Swiss National Bank and Bank of England said yesterday they would auction a combined $74 billion in one-week funding to counter the seizure in money markets. The Federal Reserve assisted by providing the ECB and SNB with access to $13 billion more of its currency, boosting the amount of dollars it makes available to counterparts to $290 billion.
Money-market interest rates around the world rose yesterday on concern that Paulson's plan will stall, causing banks to hoard cash. The three-month London interbank offered rate, or Libor, that banks charge each other for euro loans jumped to the highest level since the debut of the euro in 1999.
``Liquidity in cash instruments is absolutely dreadful,'' said Peter Lucas, chief investment officer at Jersey, Channel Islands-based Ashburton Ltd., which manages about $1.7 billion. ``People are very concerned about the risk of defaults. A 1930s- style depression remains a possibility if Congress doesn't produce the goods.''
French Sales
Bonds stayed higher after France said today the official estimate of debt sales next year is 135 billion euros, compared with 116.5 billion euros this year. That may be exceeded because of the nation's ``wider'' budget deficit, according to Royal Bank of Scotland Group Plc.
``I would now estimate actual 2009 issuance close to 145 billion euros,'' said Harvinder Sian, a senior fixed-income strategist at RBS in London. ``The risk on the budget deficit is very clearly on the upside.''
Government bond issuance in the euro region will rise next year by 39 billion euros to 672 billion euros, ING Bank NV said in a note to clients.
``Due to rising redemptions and also the effect the credit crisis is having on the real economy in the form of deteriorating public finances, issuance within the area is expected to increase,'' said Wilson Chin, a fixed-income strategist at ING in Amsterdam.
To contact the reporter on this story: Anchalee Worrachate in London at [email protected]
Last Updated: September 27, 2008 02:30 EDT

 

[makapaaa]

Junk Bond Spreads Are Distressed for First Time in Six Years

By Alan Goldstein and Bryan Keogh
Sept. 27 (Bloomberg) -- Yields on speculative-grade bonds rose to distressed levels for the first time since 2002 as the turmoil sweeping Wall Street led investors to shun all but the safest government bonds.
Investors demand 10.25 percentage points more in yield to own junk-rated securities than Treasuries, according to Merrill Lynch & Co.'s U.S. High Yield Master II index. Bonds that trade at a so-called spread of 10 percentage points or more are considered distressed.
The last time spreads were so wide was in the aftermath of Enron Corp.'s collapse earlier this decade. Now, a slowing economy and failures of some of the largest U.S. financial institutions are driving investors away. Distressed bonds default within one year 22 percent of the time, compared with 1 percent for non-distressed junk bonds, according to Fridson Investment Advisors in New York.
``Any credit perceived as exhibiting a higher level of default risk is at risk of significant price depreciation,'' Peter Acciavatti, a credit strategist at JPMorgan Chase & Co. in New York, wrote in a report yesterday. Acciavatti was the top- ranked high-yield strategist in Institutional Investor magazine's annual poll.
High-yield spreads have climbed 1.89 percentage point this month, the steepest monthly rise since September 2001, as the government seized the two largest U.S. mortgage-finance companies, Fannie Mae and Freddie Mac; Lehman Brothers Holdings Inc. was forced to file for bankruptcy; Merrill Lynch agreed to sell itself to Bank of America Corp.; American International Group Inc., the nation's biggest insurer, was taken over by the Treasury; and Washington Mutual Inc. was seized by regulators in the biggest U.S. bank failure in history.
Rescue Plan
Congressional leaders pressed toward a deal on a $700 billion financial rescue plan proposed by Treasury Secretary Henry Paulson. President George W. Bush said yesterday any disagreements would be resolved.
High-yield, high-risk, or junk, bonds are rated below Baa3 by Moody's Investors Service and BBB- by Standard & Poor's.
Financial industry failures are causing ``massive'' amounts of debt to be downgraded, S&P said in a report yesterday.
``Although credit-quality erosion can be expected during cyclical downturns, the enormity of debt amounts affected is disconcerting,'' Diane Vazza, the head of S&P's fixed income research group in New York, said in a statement.
Default Rate
The default rate among high-yield, high-risk, non-financial borrowers may rise to 23.2 percent by 2010, the highest since 1981, S&P said in a report Sept. 25. The ``worst-case scenario'' estimate suggests 353 junk-rated borrowers outside the financial sector may default in the next two years, S&P said.
Spreads on junk bonds widened 38 basis points yesterday, according to the Merrill high-yield index. A basis point is 0.01 percentage point.
Yields over benchmark rates on investment-grade bonds also widened yesterday, climbing 23 basis points to a record 459 basis points, according to Merrill's U.S. Corporate Master index.
High-yield new issuance this month has fallen to $845 million, from $5.9 billion in the same month last year, according to data compiled by Bloomberg. Since Aug. 1, seven issuers have tapped the high-yield market.
To contact the reporters on this story: Alan Goldstein in New York at [email protected]; Bryan Keogh in New York at [email protected]
Last Updated: September 27, 2008 00:01 EDT