UPDATE:CREDIT MARKETS:Some Improvement; Unease Still Prevalent
11/21 03:55 PM
By Romy Varghese
OF DOW JONES NEWSWIRES
NEW YORK (Dow Jones)--After their dramatic tumble a day earlier, credit markets Friday maintained an uneasy tone and trading remained thin for most of the day.
Several areas, such as agency mortgage-backed securities, saw some improvement, and a key barometer of investor sentiment toward credit strengthened. But activity was subdued, especially in agency debt markets ahead of the Federal Deposit Insurance Corp. hearing.
As expected, the FDIC approved key changes to the bank guarantee program including a tiered fee program, and clarification of the extent of the FDIC guarantee. This will pave the way for new debt issue in direct competition with debt securities from Fannie Mae (FNM:$0.335,0$0.005,01.52%) and Freddie Mac (FRE:$0.4473,$-0.0427,-8.71%) . Market participants said banks could start issuing FDIC guaranteed debt Monday at the earliest.
The one positive for the agency market was the retention of the risk weighting of FDIC-guaranteed debt at 20%, the same as the current level of Fannie and Freddie debt. But upon the release of the changes, short-end agency debt began to lose steam.
Investors had other concerns as well, such as the fate of U.S. automakers and of Citigroup (C:$3.67,00$-1.04,00-22.08%) , which is said to be exploring options, including a sale. The uncertainty over what Citi will look like has caused the cost of protecting its debt against default to rise Friday.
The environment remains unfavorable for credit spreads, analysts at BNP Paribas (BNPQY:$22.8500,$1.8500,8.81%) wrote, citing the "raft of bad news on the U.S. and euro-zone economies, the auto sector crisis and continued weakness of financials." Going into the weekend, systemic risk remains elevated, while markets await some resolution on Citigroup (C:$3.67,00$-1.04,00-22.08%) , they added.
Adding to the evidence of the "broad-based nature of the economic downturn," the number of firms globally whose credit default swaps trade in points up front - a characteristic of distressed credits - has jumped to 226 compared to 67 in mid-March, wrote Markit's Gavan Nolan in a note.
Financial firms continue to dominate the list, but consumer cyclicals are also seen, as well as energy and utilities. In addition, the list includes ten governments, compared to none seen in March, Nolan wrote.
Agencies
Risk premiums on Fannie Mae (FNM:$0.335,0$0.005,01.52%) and Freddie Mac (FRE:$0.4473,$-0.0427,-8.71%) debt gave back some of the dramatic gains of the morning session by the afternoon. Spreads on Fannie's 2-year note were now just 13 basis points tighter at 175/166, while Freddie's 10-year note was 16.3 basis points tighter at 154/143, according to TradeWeb data.
Mortgages
Agency mortgage-backed securities had a good afternoon as buyers including the U.S. Treasury came in to buy at the cheap levels. "It was a moderate volume day skewed toward buyers, that helped recoup some of the last couple of sessions' losses," said Art Frank of Deutsche Bank (DB:$24.03,00$1.21,005.30%) . Risk premiums were 6 basis points tighter to Treasurys, and finished the week at 280 basis points over comparable Treasurys yields.
Asset-Backed Securities
The derivative index that tracks subprime mortgages reversed course Friday, posting gains for the first time this week. Buyers coming in to cover their shorts after the drastic drop in the index this week helped spur a slight upward tick, said Art Frank of Deutsche Bank (DB:$24.03,00$1.21,005.30%) . The Markit ABX AAA 06-2 was 2.25 points tighter from its close Thursday at 39.57 cents on the dollar. This index, which had hovered above 55 points for a long time, this week saw its values erode after the Treasury said it wouldn't buy mortgage bonds under the $700 billion bailout plan.
Investment-Grade Corporates
Citigroup's (C:$3.67,00$-1.04,00-22.08%) credit default swaps traded Friday at 500 basis points, according to broker Phoenix Partners Group. The privately traded contracts closed Thursday at 430 basis points, according to CMA DataVision. That means it now costs $500,000 a year - a $70,000 increase - to protect a notional $10 million of Citi senior bonds against default for five years. This shows increased pessimism toward Citi.
The benchmark high-grade credit derivatives index, the Markit CDX IG11, was tighter at 275 basis points, compared to a close at 280 basis points the previous day.
Some $296.7 billion in corporate bonds were affected by ratings downgrades in the third quarter, Fitch Ratings said Friday. This tops the worst quarter of the 2001/2002 downturn, the agency said. "This year's rating activity clearly reflects the depth of the credit crisis and deteriorating prospects for global economic growth," said Mariarosa Verde, managing director of Fitch credit market research.
Junk Bonds
The U.S. junk bond market suffered its biggest weekly decline of 2008 this week on continued negative economic news and rising concerns that a proposed government bailout of the beleaguered U.S. automotive industry could be in doubt, Fitch Ratings said in a note. The agency said activity in the secondary market has been a touch better over the past five days compared with the last week's holiday shortened trading.
Yields on speculative grade or junk bonds remained above 20% Thursday, reaching 21.426%, according to the Merrill Lynch US High Yield Master Index. This is the highest since the index was launched in 1986.
General Motor's bonds are lower again Friday, although trading in them was limited, according to MarketAxess (MKTX:$5.42,00$0.92,0020.44%) data. The 8.375% bond due 2033 are quoted at 14.5. That's 3.5 points lower on the day. The 7.7% and 7.2% are off 9 points and 3 points, respectively, at 14.9 and 19. The pleas of the big three auto companies' executives for help from the government were unsuccessful this week.
-By Romy Varghese, Dow Jones Newswires; 201-938-4287; romy.varghese@ dowjones.com
(Prabha Natarajan and Kate Haywood contributed to this report.)
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(END) Dow Jones Newswires
11-21-081555ET
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