Godzilla sighted.
Major Credit Scare Rattles U.S. Bond Markets
NEW YORK, Aug 21 ( Reuters ) - Fear of a deterioration in the creditworthiness of borrowers around the globe is spawning a sharp sell-off in U.S. corporate bonds and other assets of a magnitude not seen since the Orange County crisis in 1994, analysts said.
The yield spread on U.S. investment-grade corporate bonds widened about 18 basis points over comparable Treasuries Friday in ''one of the largest single one-day moves ever,'' said Curtis Shambaugh, corporate bond strategist at Credit Suisse First Boston.
U.S. dollar swap spreads, a measure of the borrowing rate of a double-A-rated corporation, blew out more than 20 basis points to levels not seen since the financial scandal that bankrupted Orange County, Calif. four years ago.
And emerging market bonds, which have been caught in a downward spiral for the last week, lost anywhere from two to 12 points in price.
On Friday Venezuela loosened its grip on its currency and Russia's parliament called for President Boris Yeltsin to resign, blaming him for a painful economic slide.
The sell-off prompted a flight to quality that drove the Treasury's 30-year bond higher by nearly two points and its yield to a record low.
The markets are responding to "increasing signs that economies are slowing everywhere," said Jeff Bahrenburg, fixed-income strategist at Merrill Lynch & Co.
"We have been highlighting some drops in lending in the U.S." and a slowdown in money supply growth, he said.
The World Bank's 10-year bond, a benchmark blue chip corporate bond issue in the global markets, registered a 14 basis points widening in yield spread to 50 basis points on the day.
"There is a violent flight to quality as emerging markets turn lower," said James Keller, portfolio manager at Pacific Investment Management Co. ( PIMCO ) .
Meanwhile, U.S. dollar swap spreads also saw one of their largest one-day widenings ever. The 10-year swap spread blew out to 86 basis points from Thursday's close of 63 basis points.
The heavy use of leverage to fund many bond investments is exacerbating the selloff, analysts said.
"This is the largest margin call on fixed-income assets in history,"
said Shambaugh at CSFB.
"People who have been long ( credit ) spread product on margin or using repo are being asked to come up with cash. If they can't sell something either illiquid or low price, they are going to sell something else," Shambaugh said.
"This sell-off is now moving from the weakest government-type debt to investment-grade debt," he said.
To make matters worse, many investors with long positions in credit bonds such as corporates and emerging markets have been short government bonds as an interest rate hedge. "Now as they cover spread product, they are buying back guvvies ( government bonds ) ," said Shambaugh.
This is exaggerating price movements and driving Treasuries higher, analysts said.
"I think the market is being overwhelmed by events in emerging markets ... which potentially have ramifications for U.S. companies like the Fords and the GMs of the world," said Eugene Fullam, high-grade corporate bond strategist at Salomon Smith Barney.
The recent sell-off in emerging markets began two weeks ago amid a flight out of Russian assets amid a deepening financial crisis in the sprawling republic.
With many Asian economies still mired in economic slumps that began with large-scale currency devaluations more than a year ago, economists are concerned about a global slowdown that could finally wash up on U.S. shores.
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The financial press ought to get off the East Asia kick.
If they won't say it, I certainly will.
South America and Mexico...insolvency...banks...financial institutions.
If the FOMC did not call an emergency session today, as was reported, they ought to. I suspect they are doing something outa' sight. Such reports often have some substance in them.
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