By John Detrixhe and Bryan Keogh May 25 (Bloomberg) -- The gap between the cost to buy and sell corporate credit reached the widest in nine months in another sign investors are increasingly wary of all but the safest government bonds amid Europe’s sovereign debt crisis. The bid-ask spread for credit-default swaps on U.S. investment-grade bonds surged to an average 8.86 basis points as of May 21 from 5.42 basis points a month ago, according to CMA DataVision prices. The difference jumped to a one-year high of 10.57 on May 7, from as low as 3.1 in 2007. Higher trading costs are making it harder for investors to sell riskier securities and for companies to raise cash amid concern the global economy may sink back into recession as governments from Greece to Spain curb spending to tackle budget deficits. Global corporate bond sales are poised for the worst month in a decade, with companies issuing $48.4 billion of debt this month, down from $183 billion in April, according to data compiled by Bloomberg. “A double-dip had not even been on the radar screen,” said Jason Brady, a managing director at Thornburg Investment Management in Santa Fe, New Mexico, who helps oversee $8 billion in fixed-income assets. “It’s now a significant, though still low-probability, event.” The bid-ask spread for AA rated U.S. corporate bonds has increased to about 5 basis points from about 1 basis point earlier this year, said Mark Jicka, managing director at Mizuho Securities USA in New York. The gap for lower rated investment- grade debt has widened to about 10 basis points from 5 basis points. Spread to Treasuries Elsewhere in credit markets, the extra yield investors demand to own corporate bonds instead of similar maturity government debt rose 1 basis point to 189 basis points, or 1.89 percentage point, up from the low this year of 142 on April 21, the Bank of America Merrill Lynch Global Broad Market Corporate Index shows. Average yields rose 2.5 basis points to 3.973 percent. The rate banks say they pay for three-month loans in dollars rose above 0.5 percent for the first time in 10 months on concern government deficits may damage creditworthiness of financial institutions and slow economic growth. The London interbank offered rate for 90-day loans in dollars rose 0.0128 percentage point to 0.5097 percent, the highest since July 16, data from the British Bankers’ Association showed yesterday. Abbott Sells Abbott Laboratories sold $3 billion of notes in the biggest U.S. corporate bond offering in a month. The maker of the arthritis drug Humira tapped the bond market for the first time since February 2009, selling debt to repay some of its $3.6 billion of commercial paper and for general corporate purposes, according to a filing with the U.S. Securities and Exchange Commission. The offering included $1 billion of 4.125 percent, 10-year bonds that paid 90 basis points more than similar-maturity Treasuries. The Abbott Park, Illinois-based company’s 5.125 percent notes due in 2019 traded at a spread of 62.1 basis points on May 21, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. Debt from drugmakers has returned 1.9 percent this month through yesterday, including reinvested interest, compared with 0.07 percent for corporate bonds, according to Bank of America Merrill Lynch index data. Gentiva Financing Gentiva Health Services Inc., the U.S. home-nursing company that’s buying Odyssey HealthCare Inc., will raise at least $1.1 billion in debt to fund the takeover. The financing will include an $800 million six-year term loan, $305 million of eight-year senior bonds and a $125 million revolving line of credit, Chief Financial Officer Eric R. Slusser said in an interview. The bonds will be backed by a $305 million bridge loan. Gentiva, based in Atlanta, has received financing commitments from Bank of America Corp., Barclays Plc, General Electric Co.’s finance unit and SunTrust Bank and SunTrust Robinson Humphrey Inc., according to a statement yesterday. The cost to protect U.S. company bonds from default rose to the highest since May 20. The Markit CDX North America Investment Grade Index, used to hedge against losses on corporate debt or to speculate on creditworthiness, rose 6 basis points to a mid-price of 125.25 basis points, according to Markit Group Ltd. In London, the Markit iTraxx Europe Index of contracts linked to the debt of 125 companies rose 0.57 basis point to a mid-price of 120.4, Markit data show. The cost of insuring Asian bonds from default jumped to the highest in 10 months after a defector group said North Korean leader Kim Jong Il ordered his military to prepare to fight. North Korea Threat The Markit iTraxx Asia index of credit-default swaps on 50 investment-grade borrowers outside Japan surged 20 basis points to 158 basis points as of 10:18 a.m. in Hong Kong, according to Credit Agricole CIB. The risk benchmark is heading for its highest level since it rose to 163.4 basis points on July 20, prices from CMA DataVision in New York show. Kim ordered the military to get ready for “combat” in a May 20 broadcast, the North Korea Intellectuals Solidarity group said in a report on its website, citing a person in the communist country. The U.S. said yesterday it plans to conduct anti-submarine exercises with South Korea after the sinking of one of the South’s warships cost 46 lives. Credit-default swaps on South Korean government debt rose 9.7 basis points to 152.6 as of 11:04 a.m. in Seoul, according to CMA, on track for their highest price since they reached 152.7 basis points on July 21. Credit-default swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt. The indexes typically rise as investor confidence deteriorates and fall as it improves. Emerging Markets In emerging markets, the extra yield investors demand to own bonds instead of government debt rose 1 basis point to 338 basis points, according to JPMorgan Chase & Co.’s Emerging Market Bond index. Cia. Energetica de Minas Gerais, Brazil’s second-largest electricity generator and distributor, may sell 600 million reais ($323 million) of local bonds this year. The Brazilian utility known as Cemig may sell the bonds to extend debt maturities, Chief Financial Officer Luiz Fernando Rolla said yesterday at an event in Sao Paulo. The company may bid for the rights to build and operate transmission lines in Brazil on June 11, the executive said. Cemig is also looking for assets to buy. Bid-Ask Spread The average bid-ask spread on the 125 companies in the Markit CDX index fell yesterday to 7.94 basis points, from 8.86 basis points on May 21, CMA prices show. The spread reached a record 20.4 basis points in October 2008. Bid-ask spreads on credit swaps tied to sovereign debt soared to near record levels this month on concern the European Union is mishandling the debt crisis sweeping through its member nations. The gap on swaps tied to the 15 western European nations included in the Markit iTraxx SovX Western Europe index tightened to 8.48 basis points on May 21 after reaching 13 basis points on May 3, the widest since February 2009, CMA prices show. Europe’s debt crisis may slow the U.S. economic recovery unless officials in the region get budgets under control and adopt policies aimed at boosting growth, World Bank President Robert Zoellick said in an interview on CNBC. “You’re starting to see a recovery in the United States and it’s starting to be broader-based, and that’s a good thing, but events in Europe could bring it down,” he said. Spanish Banks Four Spanish savings banks plan to combine to form the nation’s fifth-largest financial group with more than 135 billion euros ($167 billion) in assets, as regulators push ailing lenders to merge with stronger partners. Caja de Ahorros del Mediterraneo, Grupo Cajastur, Caja de Ahorros de Santander y Cantabria and Caja de Ahorros y Monte de Piedad de Extremadura submitted a proposal to Spain’s central bank to pool their businesses, they said in a filing yesterday. Spain is seeking to shore up the lenders as the nation’s sputtering economy and widening budget deficit, forecast at 9.3 percent of gross domestic product this year, drive away investors. Spain’s banking industry “remains under pressure,” as consolidation has been “too slow,” the Washington-based International Monetary Fund said in a report yesterday. Financial market turmoil was exacerbated last week when German Chancellor Angela Merkel stepped up calls for regulation and forbade some types of short-selling without consulting her European partners. In a short-sale an investor bets on the decline in a security’s price. Financial Turmoil “Liquidity was still tough but it was improving until” Germany’s ban on short selling, said John Bender, head of U.S. fixed income for Legal & General Investment Management America, who oversees more than $15 billion. “We saw a material decrease in liquidity in the credit markets” for corporate bonds and credit-default swaps. “The credit markets were effectively not functioning” as investors reacted to Europe’s $1 trillion bailout plan to stabilize its sovereign debt crisis, he said. “Bid offers were so wide it was very difficult to get trades done.” The bid-ask spread on Goldman Sachs Group Inc.’s 5.375 bonds due in 2020 increased to about 20 basis points from about 5 to 10 basis points, Brady said. The spread has increased even though the debt is frequently traded, or liquid, and is Goldman’s most recent dollar-denominated issue, he said. “It’s just a function of broker dealers trying to protect themselves,” Brady said. “When there’s a lot of volatility, they feel the need to protect themselves with a wider bid-ask, and that takes liquidity out.” The New York-based investment bank’s debt rose 0.27 cent to 96.17 cents on the dollar to yield 266.5 basis points more than similar-maturity Treasuries, Trace data show. To contact the reporters on this story: John Detrixhe in New York at jdetrixhe1@bloomberg.net; Bryan Keogh in London at bkeogh4@bloomberg.net

Source