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Strategies & Market Trends : John Pitera's Market Laboratory -- Ignore unavailable to you. Want to Upgrade?

To: Hawkmoon who wrote (9853)	8/20/2008 7:22:02 PM
From: John Pitera	Read Replies (1) \| Respond to of 33421

Investment-Grade Yield Spreads Rise to Record 311 Basis Points By Gabrielle Coppola Aug. 20 (Bloomberg) -- The extra yield investors demand to own U.S. investment-grade bonds over Treasuries rose to a record for a third straight day amid concern that financial companies may take more writedowns and losses. The gap climbed 3 basis points to a record 311 basis points today, according to Merrill Lynch & Co.'s U.S. Corporate Master index. It was the third time the spread reached a new high this week, surpassing the gap of 305 basis points set March 20, just after the government brokered a takeover of Bear Stearns Cos. Investors are commanding greater concessions from banks and brokerages, which have logged $504 billion in asset writedowns and credit losses since the start of 2007. Investment-grade spreads will keep climbing until investors are assured that financial companies are well capitalized, said Matthew Eagan, a vice president at Loomis Sayles & Co. in Boston. ``You've got to get to a point where people feel confident in the financial system, that the credit markdowns are exposed,'' said Eagan, who helps oversee $60 billion in fixed-income assets. ``Until we get to that point, there will be fear in the marketplace.'' A major source of demand for corporate bonds also has evaporated as hedge funds, finance companies, banks and brokers, sell off their bond holdings and scale back new purchases to replenish capital eroded by the mortgage-related losses. ``The concept of de-leveraging, based on the scarcity of capital, appears to us to be the primary driver of what's going on right now,'' Brian Gevry, the chief executive officer at Boyd Watterson Asset Management in Cleveland, which oversees $3 billion in fixed-income assets. Gevry said the rising spreads have made investment-grade corporate bonds attractive. Fannie, Freddie High-yield bond spreads rose 7 basis points today to 830 basis points, the highest since March 20, according to Merrill's U.S. High-Yield Master II index. High-yield, or junk, bonds are rated below Baa3 by Moody's Investors Service and BBB- by Standard & Poor's. Speculation that shareholders of mortgage-finance companies Fannie Mae and Freddie Mac will be wiped out by a government bailout has spurred a flight to quality that is also pressuring bond yield spreads, Eagan said. A positive resolution with Fannie and Freddie could cause spreads to tighten, but investors would quickly drive them out again by focusing on other beleaguered financial institutions, Eagan said. ``It feels painful when you're going through it because the *market's volatile and there's a lot of uncertainty and a lot of fear*,'' Eagan said. ``But now's the time when you've got to look at the market and find the bargains.'' To contact the reporter on this story: Gabrielle Coppola in New York at gcoppola@bloomberg.net Last Updated: August 20, 2008 17:25 EDT