High-grade market takes beating on bank rumors; Roche bonds lose steam, Citi, Bank of America lower

By Andrea Heisinger

New York, Feb. 20 - The investment-grade primary market saw a virtual shutdown for new issues Friday over fears of bank instability and what the government will do about it.

Four of the six tranches of the $16 billion Roche deal were seen holding gains or losing ground slightly in trading Friday, with a recent issue from DCP Midstream, LLC widening considerably.

Spreads were generally wider by late Friday, with Treasury yields falling from the previous day. The yield on the five-year benchmark bond was down 5 basis points to 1.83%.

Brutal day in primary

The tone in the primary was "ugly" late Friday, a market source said, adding "I think you'll hear that from everyone."

The main themes he was hearing others talk about were that the U.S. markets need a resolution on the "money center banks," he said.

There is also a consensus among the syndicate desks that it "feels like we need some leadership over this weekend out of Washington beyond what has been done thus far."

He was referring to rumors flying about the possible nationalization of Citigroup and Bank of America Corp. after their shares continued to plummet.

Issuance could stagnate

A syndicate source said issuance going forward is "not necessarily going to be robust."

"We may be at a bit of an inflection point again," he said. "The high-grade market has gone through so many iterations of being more or less closed or being half open or being open at a price or being open only to certain sectors."

This harkens back to late 2008 when the financial sector began to deteriorate and issuers with BBB ratings were virtually shut out of the market.

"We're potentially heading back into an environment where only a certain subset of issuers can get deals done," he said.

If another subset were forced to issue at where spreads actually are then "it's more comment on the feasibility of their business models than anything else," the source said.

Bank bonds take beating

Outstanding bonds from bank names were seen doing poorly in the secondary Friday, a trader said. But some recovered slightly by the end of the day.

As rumors continued to swirl about the possible nationalization of Citigroup and Bank of America, and their stock shares plunged, their bonds were not immune.

Citigroup's bonds widened early in the day, the trader said, but had tightened some by the market close.

Bank of America did not fare so well, with their bonds remaining wider by the end of the day.

Other banks like JPMorgan Chase & Co. and Wells Fargo were also seen taking a hit in the stock market, but dramatic shifts were not seen with their bonds.

Roche bonds lose gains

The four fixed-rate tranches from the $16 billion Roche deal were seen unchanged or wider from Thursday's levels in the secondary market, a trader said. They remain considerably tighter than their pricing level.

The 4.5% notes due 2012 were at 275 bps bid, 267 bps offered, which was virtually unchanged from the previous day's closing level. They were sold at 335 bps over Treasuries.

The 5% notes due 2014 were at 295 bps bid, 290 bps offered. This was about 5 bps wider than Thursday's level, although still in considerably from the Treasuries plus 335 bps price.

Their 6% bonds due 2019 priced at Treasuries plus 345 bps and were seen at 313 bps bid, 308 bps offered Friday. This was mostly unchanged from the previous day's closing level.

A final tranche of 7% notes due 2039 was at 325 bps bid, 315 bps offered late Friday. This is about 40 bps tighter than the price of 365 bps over Treasuries, but about 5 bps wider than Thursday.

The market didn't have much trouble absorbing a deal this size, a syndicate source said.

The source saw the bonds about 5 bps tighter.

"For a deal of such size that is decent performance in a weak market," they said. "To have the Roche deal perform flat-to-well was an important data point that this market needed."

Snap-on unchanged

The two tranches of the issue of notes priced Thursday by Snap-on Inc. remained tighter than where they priced, but they were unchanged from Thursday.

The 5.85% bonds due 2014 remained at 390 bps bid, in from the price of Treasuries plus 400 bps.

The 6.7% bonds due 2019 priced at 387.5 bps over Treasuries and were trading at 380 bps.

DCP Midstream widens

An issue priced by DCP Midstream, LLC via Rule 144A and Regulation S on Thursday was seen about 10 bps wider from the price by late Friday afternoon, a trader said.

The 9.75% notes due 2019 were at 725 bps bid, 715 bps offered, out from the price of 713.1 bps over Treasuries.

B of A, Citi bonds top trading

An FDIC-backed bond from Bank of America was seen topping the day's trading late Friday.

The company's 2.1% notes due 2012 were at the top of the list.

Right behind them was a 2.125% FDIC-backed bond due 2012 from Citigroup.

A 4.75% bond due 2015 from the ill-performing issue earlier in the week by E.I. du Pont de Nemours & Co. was also seen at high volume in trading.

Bank, broker CDS widen

Bank credit-default swaps widened by 15 to 70 bps Friday, a trader said. At the far end of that scale was Citigroup, which was out 70 bps to 455 bps bid, 475 bps offered.

Brokerage CDS were only slightly better, widening 15 to 45 bps, the trader said. Merrill Lynch was seen 45 bps wider.

High-grade index, credit widen

The investment-grade index was seen 20 bps wider at one point Friday, a high-grade syndicate source said.

Credit is also definitely wider weak after week, he said.

Morgan Stanley, Citi big movers

A 6% bond due 2015 from Morgan Stanley was one of the big movers of the day, tightening about 50 bps as other bank and financial names suffered in the secondary.

Citigroup was one of those, with its 5.5% bond due 2017 seen nearly 100 bps wider than the previous week.

Paul Harris contributed to this commentary

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