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Corporate Bonds Hammered By Fears About Greece, Oil, Rules
Dow Jones, 4 May 2010

High-grade corporate bonds were getting crushed Tuesday, led by big international banks, due to fresh concerns that European debt woes are far from contained.

"People have become increasingly nervous that the current Greek bailout won’t cut it and are now looking towards Spain and Portugal as additional concerns," said Richard Lee, managing director of fixed income at Wall Street Access in New York.

The risk premium on Credit Suisse (CS) 5.00% notes due 2013 has widened by 16 basis points, or 0.16 percentage point, to 96 basis points, according to MarketAxess. The risk premium on Barclays Bank 5.125% bonds due 2020 are wider by 7 basis points to 152 basis points.

Risk premiums are the extra income investors demand for what they see as the added risk of owning corporate debt instead of Treasurys. As the premium widens, the relative value of the bonds falls.

"The current Greek debt crisis looks to be a classic case of potential 'contagion' in global financial markets," said Robert C. Hockett, professor at Cornell University Law School. Nations such as Greece, where tax collection has been historically lax, find it all the more challenging to pay down their debts on schedule, he added.

The situation can deteriorate rapidly when speculators in financial markets begin betting en masse against a country such as Greece, Hockett said, "for in these cases the fears of some investors can become self-fulfilling prophecies."

While the European debt crisis is the main focus of investors, other variables are clearly contributing to a weakening in investment-grade corporate spreads.

The oil spill in the Gulf of Mexico, the Securities and Exchange Commission's investigation into trading practices at Goldman Sachs Group Inc. (GS), debate about financial-regulation overhaul, and even the recent failed car bombing in New York's Times Square are all pounding bond spreads.

To be sure, oil companies will face huge liability payments and clean-up costs that could put the billions of dollars in profits posted quarterly by these cash cows in jeopardy.

It appears that the Senate is considering a measure that would expand the maximum corporate liability for an oil spill from the current $75 million to $10 billion, according to Guy LeBas, chief fixed-income strategist at Janney Capital Markets.

LeBas said that, given the political climate and public outrage over oil spills in general, "there's a high probability this or a similar measure will pass, and the cost of the Gulf disaster will almost certainly reach $10 billion." That puts BP PLC (BP, BP.LN), Transocean Ltd. (RIG) and others on the hook for increased clean-up costs.

"The debt markets seem to be concerned about this prospect as well, seeing as all four of those companies were among the most traded corporate names Monday," LeBas said.

Bonds continue to slip in the oil and gas sector as trading remains hurried in that space.

BP 5.25% notes due 2013 are 32 basis points weaker while its 3.875% notes due 2015 are off 30 basis points.

And while the fanfare over Goldman Sachs has died down somewhat, bonds and credit default swaps also remain vulnerable.

Goldman 5.375% bonds due 2020 are 24 basis points weaker to 224 basis points over Treasurys while the cost to protect those bonds is 165 basis points, according to Phoenix Partners Group. That means it costs $165,000 to insure just $10 million of Goldman's senior bonds for five years.

"When you lump everything together, there are a lot of things that can rock the market, but few things that can lift it," Lee said.


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