By Bryan Keogh and Sonja Cheung April 30 (Bloomberg) -- The record rally in corporate bonds is showing signs of cracking, with yields rising the most in 13 months relative to government debt and new sales falling to the lowest level this year. The extra interest investors demand to own company bonds widened 6 basis points this week to 149 basis points, according to Bank of America Merrill Lynch’s Global Broad Market Corporate Index. Global company bond issuance tumbled 56 percent from last week to $19.6 billion, data compiled by Bloomberg show. Ratings downgrades in Greece, Portugal and Spain drove investors from credit markets on concern worsening government finances may undermine the global recovery, curbing revenue and providing less of a cushion for borrowers to meet debt payments. Company bond spreads were at a 2 1/2-year low before this week, generating total returns of about 22 percent including reinvested interest since the market bottomed in March 2009. “Corporate bonds could only defy gravity for so long,” said Eric Cherpion, deputy head of syndicate at Societe Generale SA in London. “The volatility from Greece is pushing spreads out, which have remained tight despite the credit risks in the market.” The pullback was sharpest in Europe, where spreads widened 11 basis points to a six-week high of 152 basis points, according to Bank of America’s EMU Corporate index. U.S. investment-grade spreads rose 4 basis points to 155 basis points, or 1.55 percentage points. Global corporate bond spreads are still down from the record 511 basis points in March 2009 and 176 at the end of last year, the data show. Toyota, GMAC Elsewhere in credit markets, Toyota Motor Corp. sold $1.25 billion of bonds backed by auto loans and GMAC Inc.’s Ally Bank issued $703 million of debt backed by payments from auto dealers, according to people familiar with the transactions, who declined to be identified because terms aren’t public. U.S. commercial paper outstanding jumped the most in five months, the Federal Reserve said yesterday on its website. The market for short-term IOUs without seasonal adjustment rose $19.7 billion to $1.1 trillion in the week ended April 28, the biggest surge since the period ended Nov. 18 and the highest level since March 10, according to data compiled by Bloomberg. On a seasonally adjusted basis, the amount soared $32.9 billion to $1.11 trillion, the highest level since March 31. The Fed’s holdings of bonds of government-chartered agencies such as Fannie Mae and Freddie Mac on behalf of foreign institutions and central banks increased for a sixth straight week to $788 billion, up from last year’s low of $760 billion in November and below the peak of $984 billion in July 2008. Covered Bonds Spreads on covered bonds, which are mainly issued by banks in Europe, widened 2 basis points to 106 basis points more than government debt as of yesterday, the biggest gap since Aug. 12, according to Bank of America Merrill Lynch’s EMU Covered Bonds Index. Greek covered bonds had their ratings cut for the second time in a week by Moody’s Investors Service, which cited the expensive refinancing rates issuers face as a result of the nation’s soaring funding costs. Greek bonds plunged this week after Standard & Poor’s slashed its credit rating three steps to BB+, or below investment grade. Emerging market bonds fell, as spreads widened 3 basis points to 259 basis points, up from 230 on April 15, JPMorgan Chase & Co.’s EMBI+ Index shows. In Brazil, Fibria Celulose SA sold $750 million of 10-year bonds to yield 7.625 percent, Bloomberg data show, while Sao Paolo-based Marfrig Alimentos SA, the world’s fourth-largest meatpacker, issued $500 million of similar-maturity notes to yield 9.75 percent. Bond Spreads Brazil’s real surged to the strongest level in more than three months after the central bank lifted its benchmark interest rate for the first time in more than a year to 9.5 percent from a record low of 8.75 percent. Average spreads on global corporate bonds widened the most this week since the five-day period ended March 13, 2009, when they jumped 14 basis points, the Bank of America index shows. The index has narrowed in 42 of the past 54 weeks. Spreads finished last week at 143 basis points, after dropping to 142 on April 21, the lowest since November 2007. The last time spreads rose in a week was in the period ended Feb. 12. The widening may not last, as profits are still growing, said Guy Lebas, chief fixed-income strategist at Janney Montgomery Scott LLC in Philadelphia. “What we’re seeing is a short-lived widening rather than an end to the rally,” Lebas said in an e-mail. “Investor risk aversion appears to be increasing in response to sovereign credit concerns.” Credit-Default Swaps In the U.S., the Markit CDX North America Investment Grade Index of credit-default swaps dropped 4.5 basis points to a mid- price of 94 basis points. The Markit iTraxx Europe Index of 125 investment-grade companies fell 8 basis points to 90, according to Markit Group Ltd. The indexes are a benchmark for the cost of insuring company bonds against default. A decline signals an improvement in investor perceptions of credit quality. Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a company fail to adhere to its debt agreements. A basis point on a contract protecting $10 million of debt from default for five years is equivalent to $1,000 a year. The Markit iTraxx Asia index of 50 investment-grade borrowers outside Japan fell 2 basis points to 99 basis points, while the Markit iTraxx Japan index declined 9 basis points to 99, according to prices from Royal Bank of Scotland Group Plc and Morgan Stanley. Daiwa Loans Daiwa Securities Group Inc., Japan’s second-largest brokerage, borrowed 50 billion yen ($531 million) to fund expansion in Asia. The company got a 30 billion yen three-year loan and a 20 billion yen five-year loan from 30 banks led by Mitsubishi UFJ Financial Group Inc., said Daiwa spokesman Ryoji Fuchinoue, without elaborating. Global corporate bond issuance fell from $44.8 billion last week, with the monthly total at $164.2 billion compared with $311 billion in March, Bloomberg data show. In the U.S., sales fell to $12.9 billion from $23.1 billion last week, while European issuance dropped to 2.4 billion euros from 4.5 billion euros. Smiths Group Plc, the world’s biggest maker of airport scanners, was the only investment-grade issuer to tap the European debt market. Sales Pulled Casino Guichard-Perrachon SA, the biggest supermarket owner in Paris, withdrew initial yield guidance for its sale of 8 1/2- year notes, while U.K. rail and bus operator National Express Group Plc delayed its debut euro debt issue. The Czech government also postponed offerings of euro-denominated notes. High-yield companies sold $7.23 billion in debt globally, matching the weekly average for the year and down from $10.2 billion last week. Ziggo, the Dutch cable television operator, sold 1.2 billion euros of non-investment grade, 8 percent notes, while blue jeans maker Levi Strauss & Co. issued 300 million euros of 7.75 percent bonds due 2018. High-yield, or junk, bonds are ranked lower than Baa3 by Moody’s and below BBB- by S&P. Spreads on junk debt widened 13 basis points to 569 basis points, the first increase in eight weeks, according to Bank of America’s Global High-Yield Index. “The high-yield market seems to be trading in its own parallel universe” and is unaffected by the Greek debt crisis because it’s used to volatility, said Alex Moss, a fund manager at Insight Investment Management in London. “There’s been a lot of inflow into the market recently and investors have committed money for the long term and are not inclined to sell at the moment.” To contact the reporters on this story: Bryan Keogh in London at bkeogh4@bloomberg.net; Sonja Cheung in London at scheung58@bloomberg.net

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