The corporate bond market appeared to have found a footing in the past sessions, despite the pressure on General Motors and Ford Motors increasing further on the back of Moody’s Investors Service’s negative credit rating actions.
Moody’s downgraded General Motors, increased the chance of the struggling US carmaker being cut to speculative grade status, and placed rival Ford Motors on review for a possuble downgrade. The downgrade meant that all three credit agencies now rate GM at the lowest level of investment grade and all with a negative outlook.
Bonds of both GM and Ford weakened further following the events, but other sectors showed signs of impovement, both in Europe and in the US. Both markets have weakened sharply in recent weeks, giving back their performance since the start of the year, and many have questioned if the bond market rally that started at the end of 2002 had come to an end.
The combination of rising Treasury yields, the uncertainty surrounding GM and an increase in takeover activity, inluding several leveraged buyouts, was seen as bad news for the bond market and spreads moved sharply wider.
Although the negative factors remained in place, the market appered to have found a ceiling in the past two sessions.
“Encouragingly, the European market seemingly ignored the bad news on the ratings front for GM and Ford,” said Suki Mann, credit strategist at SG CIB in London.
The benchmark bonds in the telecommunications and utilities sectors strenghtened, with the yield spread on long-dated paper of France Telecom and Telecom Italia tightening by about 4 basis points. French utilities Veolia and Suez also put in a strong performance, tightening 5bp and 4bp, respectively.
In the US, the industrial sector outside the auto vehicle makers also strengthened.
Analysts were cautious about claiming that the market had turned, but said it would be an encouraging sign if the developments in the auto sector separately to the rest of the bond market and not pull the whole market lower, as happened during March.
“Of course, one day does not make a trend,” commented Edward Marrinan, head of North American high grade credit strategy at JPMorgan in New York. “But even the bears would have to sit up and take notice of the widespread strength in high grade spreads in the face of the otherwise ominous news surrounding our market’s biggest problem credits.
But for the carmakers, however, the outlook remained bleak, and their bonds were slightly weaker yesterday.
“Given all three rating agencies now have GM at just above junk and a majority of investors can not hold cross-over credits, Moody’s action could trigger further selling as accounts look to reduce exposure before a second-half downgrade to junk,” said Christophe Boulanger, auto credit analyst at Dresdner Kleinwort Wasserstein.
However, the extent of forced selling that will ocurr in the event a GM downgrade is uncertain.
Peter Eerdmans, senior investment consultant at Watson Wyatt, which advises pension funds in the UK, said most pension fund guidelines would allow fund managers to hold bonds rated investment grade but not speculative grade.
But fears of an overnight sell-of may yet prove overstated. “Our own guidelines say that a fund manager must sell a bond that is not eligible for his portfolio within two months,” said Mr Eerdman. He added that recently several new fund mandates also allow an exposure to the high-yield market of up to 10 per cent.
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