Bond market freezes on stock market slide, analyst reports, oil; lull seen running into July

By Andrea Heisinger and Paul Deckelman

Omaha, June 26 - The investment-grade bond market virtually shut down Thursday after negative news poured from different directions.

As one market source said, the day was "pretty ugly."

"I don't know how else to put it," he added.

Goldman Sachs equity analysts released a banking report with predictions of more losses from names like Citigroup and Merrill Lynch.

The latter name had been in the rumor mill for a while based on profits being way down, the source said.

"Financials still have a long way to fall," he said.

In the investment-grade secondary market Thursday, advancing issues led decliners by a relatively narrow margin, while overall market activity, reflected in dollar volumes, eased by 3% from Wednesday's pace.

Spreads in general were seen wider, as Treasury yields declined; the yield on the benchmark 10-year issue, for instance, fell by 7 basis points to 4.03%.

Conditions hold back new deals

Among other unsavory news was Lehman Brothers closing at a 52-week low, and other financials also hitting lows.

Issuance remains beholden to the microeconomic environment, a source said.

More established names are not going to want to pay up to issue anything, and smaller, lesser rated names may not even be able to tap the market, he said.

"We'll have a few decent days here and there, but I don't see anything perking up for a little while," he said.

One source said they didn't know of anyone issuing Friday, or during the short week ahead.

Most issuance will likely hold off until after the Fourth of July holiday, he said.

"Things are looking pretty slim until the second week in July," he said. "There's not much really planned before then."

"I think it's going to stay quiet for the foreseeable future."

People are more intent on selling right now, rather than buying, a source said.

Along with the sharp fall of the stock market Thursday, the bond market also had to contend with the news of still higher oil prices coupled with the continued losses from big financial names.

"It's just not pretty out there right now," a source said. "It's unclear when issuers will feel OK about coming into the market."

New Rio Tinto bonds mixed

A trader said that the new Rio Tinto Finance (USA) Ltd. 6½% notes due 2018 were being offered at 253 bps, 3 bps wider than the spread of 250 bps over comparable Treasuries at which the mining company priced the $1.75 billion of new bonds on Tuesday as part of a three-part offering.

He said that its 5.875% notes due 2013, $2.5 billion of which had priced as part of that deal at 240 bps over, had last been seen late Wednesday trading at 238 bps bid, 233 bps offered, but he had seen nothing on them on Thursday.

And that was pretty much the way it went for issues priced within the last several sessions. The trader said, for instance that he had "absolutely nothing on" the new Rockies Express Pipeline LLC issue; $1.3 billion of the bonds priced in a three-part offering on Tuesday.

Quiet market seen

In general, the trader said, "there's not a lot to report," with "everybody getting into a July 4 mood" ahead of the holiday next week. He said that "we saw messages that the Street was just inundated with bid-wanteds - and there's really no liquidity at the moment because nobody is looking to add on [to their positions] before the month-end and quarter end."

Liquidity, he reiterated, "is really drying up."

J&J seen mixed

Among other issues, he said that recently priced Johnson & Johnson 5.15% notes due 2018, which had very actively traded around on Wednesday, were hanging around the 101 bps level, "a little bit tighter" than the 103 bps level at which the $900 million of bonds had priced on June 18.

A market source at another desk meantime saw the New Brunswick, N.J.-based medical products company's 5.85% bonds due 2038 trading at 118 bps, out from the 113 bps level at which it had priced the $700 million of bonds on June 18.

Thomson Reuters trades wider

The source saw a fair amount of trading in the new Thomson Reuters Corp. 5.95% notes due 2013, quoting them at 249 bps over, out a little from the 243 bps spread at which the $750 million of bonds priced on June 17 as part of a two-part deal.

The other half of that offering, the $1 billion of 6.50% notes due 2018, was also a little wider at 246 bps, versus the 243 bps at which the bonds had priced.

Veolia bonds remain firm

On the other hand, Veolia Environment's 6% notes due 2018 were being quoted at 180 bps over, well in from the 225 bps spread at which the $700 million of bonds had priced on June 1, as part of a three-part deal.

Merrill Lynch widens out

Back among the established issues, a source saw Merrill Lynch's 5.45% notes due 2013 having widened out about 35 bps to the 370 bps level. That widening came against a backdrop of negative analyst commentary from Goldman Sachs and from Sanford C. Bernstein, both of which said in separate research notes that the big brokerage was likely to post a second quarter loss. They predicted Merrill would also take more large writedowns, of anywhere from $3.5 billion to $4.2 billion.

A trader saw Merrill Lynch's debt-protection costs widen out by some 15 bps on the session to 250 bps bid, 260 bps offered.

The trader generally saw credit-default swap costs for major brokerage paper between 10 bps and 20 bps wider. He also saw big-bank CDS costs 10 bps to 20 bps wider as well.

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