Washington Mutual keeps dropping; most financials weak

By Paul Deckelman and Sheri Kasprzak

New York, July 24 - The financial sector was particularly weak in investment-grade trading Thursday, in line with a downturn in the sectors' shares.

One of the biggest disasters was Washington Mutual Inc., whose bonds continued to widen out and shares continued to fall, while its debt-protection costs kept rising in the aftermath of the huge loss that the savings-and-loan institution reported on Tuesday.

Overall, advancing issues trailed decliners by an eight-to-five ratio, while market activity, reflected in dollar volumes, was down 16% from Wednesday's pace.

Spreads in general were seen wider, in line with notably lower Treasury yields; for instance, the yield on the benchmark 10-year issue tightened by 12 basis points to an even 4%.

Toyota terms announced

Leading another light day for new issues, the Toyota Motor Credit Corp. announced terms on $500 million in two-year series B floating-rate notes that priced Wednesday.

The notes are due July 28, 2010, and have a coupon of Libor plus 10 bps.

Agents were Merrill Lynch, Pierce, Fenner & Smith; and Citigroup Global Markets.

Few new deals seen Friday

Elsewhere, a market source said primary activity is likely to remain quiet again on Friday.

"I don't see any problems in the market, but we're just not seeing a big volume of pricings," he said.

"Things may pick up a little bit next week."

Asked what sectors might be in the market, the source said he feels pretty confident that financial and tech names will probably make an appearance, but he said he couldn't name any particular offerings.

Financials seen weaker

A trader said that with financial-sector stocks getting hit badly - the group dropped 6.7% on the day - the sectors bonds "were a little bit weaker across the board. Near the end of the day, weakness in the stock market translated into weakness in the financials," although he did not see a lot of financial debt actually trading around. "So I can't say that things are really getting whacked."

Instead, he characterized it as "just a weakness in the market."

WaMu leads the way lower

With Washington Mutual's shares getting hit on continued negative investor response to the poor numbers put out by the giant Seattle-based thrift on Tuesday - WaMu's NYSE-traded shares tumbled 62 cents, or 13.33%, to $4.03, on volume of 335 million, about five times the usual daily handle - he said its bonds "were weaker across the board," although he said that he saw "a lot of paper offered out there, but I didn't see a lot of trading."

He estimated that generically speaking, the bonds - which have fallen so far that they are now usually quoted in dollar-price terms rather than on a spread-versus Treasuries basis, despite their nominally still-investment-grade ratings - were down about 3 to 5 points, particularly the longer-dated paper.

"But I didn't necessarily see a lot trading."

At another shop, a trader characterized WaMu as "the big name today," quoting its 4% notes due 2009 down 2 points at 89 bid, 91 offered. Its 5% notes due 2012 were seen at 70.5 bid, which translates to a spread of some 1,277 bps over Treasuries, while its 5.65% notes due 2014 dropped to 65.25, or 1,097 bps over.

A trader watching the credit-default swaps market meantime said that the thrift's debt-protection costs had ballooned out by 125 bps on the session - a sure sign of waning investor confidence in the company - quoting its CDS cost at 835 bps bid, 855 bps offered.

On Tuesday, WaMu reported a second-quarter loss of $3.3 billion, due to the increases in loss reserves which the largest U.S. savings institution took to cover souring loans in its mortgage portfolio. While its bonds initially held steady, perhaps influenced by company executives' assertions that its liquidity and capitalization is more than adequate, those bonds and shares were in retreat Wednesday, with the downturn spilling over into Thursday as well.

Financials mixed despite WaMu slide

In the wake of WaMu's well-publicized troubles, other financial-sector downsiders included J.P. Morgan Chase & Co.'s 6% notes due 2018, seen 19 bps wider at 237 bps, as well as Lehman Brothers Holdings Inc.'s 6 7/8% notes due 2018 whose spread widened by 25 bps to just under 400 bps. Wachovia Corp.'s 7.98% notes due 2018 moved out around 20 bps, to 600 bps over.

However, other financial issues were seen mostly mixed. Bank of America's 4.75% notes due 2015 were quoted having come in by 10 bps to the 185 bps level, although a market source did see its 5.65% notes due 2018 essentially unchanged at 268 bps.

Another gainer was American Express Co.'s 7% notes due 2018, also in by 10 bps to about the 295 bps level.

A trader said that credit-protection costs for big-bank and major brokerage paper was 8 bps to 15 bps wider for the former - apart from the big jump taken by WaMu - and 5 bps to 15 bps wider for the latter.

Non-financials also mostly wider

Among the industrials, a market source saw Cisco Systems Inc.'s 5.25% notes due 2011 wider by 7 bps on the day at 123 bps, AT&T Inc.'s 5.60% notes due 2018 wider by 1 bp at 159 bps, and Comcast Corp.'s 6.40% bonds due 2038 wider by 8 bps at 253 bps.

However, a significant exception to the trend was Philip Morris International Inc., whose 4.875% notes due 2013 tightened by some 37 bps to 168 bps, after the tobacco giant reported a 23% rise in quarterly earnings on Wednesday.

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