Volatility leaves new bonds absent; industrials move out; Abbott bonds mixed in secondary

By Andrea Heisinger and Cristal Cody

New York, May 25 - New high-grade bonds disappeared from the market on Tuesday as issuers were spooked by increasing volatility.

One source said he had hoped that Monday's $3 billion sale from Abbott Laboratories would convince others that it was stable enough to issue bonds.

"We thought there might be some momentum," he said.

Instead, the market was quiet as the stock market tanked on renewed fears about the world economy and the oil spill in the Gulf of Mexico that doesn't seem close to being stopped.

The industrial sector moved out in secondary trading, while the new notes from Abbott Laboratories were mixed in trading, sources said.

The CDX Series 14 North American high-grade index was weaker a second day and widened 3 basis points to a mid bid-asked spread level of 126 bps, according to a source.

Overall investment-grade Trace volume gained 13% to nearly $9.5 billion, a market source said.

Elsewhere, yields on the 10-year Treasury benchmark notes fell to the lowest this year on nagging concerns with overseas investments and rising bank lending rates amid a "so-so" government auction of two-year debt on Tuesday, a source said.

The yield on the 10-year note was 5 bps tighter at 3.15% after earlier falling to 3.07%, the lowest since April 2009.

The yield on the two-year note was 2 bps wider at 0.75%.

The yield on the 30-year bond fell 3 bps to 4.06%.

The fears about eurozone debt continued a day after the Bank of Spain took over savings bank CajaSur. Investors still are unsure of the nearly $1 trillion loan package the European Union and the International Monetary Fund offered earlier this month to prevent defaults.

"Everything is predominantly driven by overseas," said Dan Greenhaus, market strategist at Miller Tabak & Co. "The auction in the afternoon had a little bit of an impact in terms of mitigating strength, but in the last couple of days, everything has been driven by risk aversion to the European situation. It's been an extraordinary run of the bond market."

The Treasury Department sold $42 billion of two-year notes at a yield of 0.769%.

The government also plans to sell $40 billion of five-year notes on Wednesday and $31 billion of seven-year notes on Thursday.

Empire District 'pleased'

A $100 million sale of 4.65% 10-year first mortgage bonds by Empire District Electric Co. was done on Monday to take advantage of the market and an increase in size was not considered, a spokesperson said on Tuesday.

"We were pleased with how the deal went and [with] the price of the bonds," Amy Bass, director of corporate communications for Empire, said in an e-mail message.

The utility priced bonds to take advantage of some refinancing opportunities and to meet the company's needs, Bass said.

They went with the 10-year notes because "this fit best in our maturity schedule."

The electric utility is based in Joplin, Mo.

Market 'horrible'

It was not a pretty start to the day when the markets started out down and stayed that way. A syndicate source, when asked why there were no new bonds priced on Tuesday, called the market "horrible" after the market close.

"It was down 200 points when we walked in this morning," he said. "Everything fell apart."

There was no one who was going to give the "go" call to an issuer.

"You'd have to be pretty brave to tell someone to go today. If it [the deal] falls apart, that's on you."

There will mostly be more frequent issuers selling bonds in the short term, like utilities and other well-known names.

"Anyone with a story to tell or who's not a frequent issuer, people are skeptical of throwing money at them," a source said.

One example was the Abbott Laboratories deal from the previous day. It had "great books" when the $3 billion sale was priced, but the bonds ended up moving out in trading a day later.

The market remains day-to-day, the source said, adding that "no one's going to pick a day to issue and go with it."

It's possible there could be bonds priced on Wednesday if there's enough confidence, he said.

"I know there are a few guys on the fence."

Industrials wider

Industrials were among the most active in investment-grade bond trading on Tuesday, according to sources.

"Overall spreads were out 5 to 10 basis points," said one trader reached near market closing.

For example, Dow Chemical Co.'s 8.55% notes due 2019 were seen trading at 270 bps late in the day - 10 bps wider compared to Monday, according to sources.

Abbott mixed

The $3 billion of senior unsecured notes (A1/AA/) Abbott Laboratories sold on Monday were mixed in secondary trading on Tuesday, according to one trader.

The first tranche of 2.7% notes due 2015 priced at Treasuries plus 70 bps and had first tightened in the secondary to 68 bps bid, 64 bps offered.

On Tuesday, the notes were seen trading wider at 70 bps bid, 65 bps offered, the source said.

Abbott's second tranche of 4.125% notes due 2020 were the only notes to firm in secondary trading on Tuesday, according to the source.

The 10-year notes were sold at a spread of Treasures plus 90 bps and were quoted later that day at 90 bps bid, 85 bps offered.

In activity late Tuesday, the notes tightened to 88 bps bid, 85 bps offered, the trader said.

Abbott's last tranche of 5.3% bonds due 2040 widened in next-day trading. The bonds had priced at 122 bps over Treasuries and were seen later that day at 122 bps bid, 117 bps offered. The trader saw the "30-years at 129, 126" late Tuesday.

The health-care company is based in Abbott Park, Ill.

Bank CDS costs rise

A trader who watches the credit default swaps market said that the cost of protecting holders of bonds issued by major banks like Bank of America Corp., Citigroup Inc. and JPMorgan Chase & Co. against a possible event of default rose by between 3 bps and 13 bps on the session, reflecting renewed investor unease with the sector.

He also saw the CDS protection cost of bonds of major investment banking houses like Morgan Stanley and Goldman Sachs Group, Inc. 7 bps to 22 bps higher.

Paul Deckelman contributed to this report

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