By Shannon D. Harrington and Sapna Maheshwari June 7 (Bloomberg) -- The biggest sale of junk bonds in more than three weeks and a flattening in the rate at which banks lend to each other are stoking optimism the worst rout for credit markets since 2008 may be easing. Spectrum Brands Inc. of Atlanta, which makes Rayovac batteries, pet food and lawn-care products, sold $750 million of eight-year debt on June 4 in the first offering by a U.S. high- yield, high-risk issuer in more than a week. The three-month London interbank offered rate, or Libor, in dollars was little changed last week, after the barometer of the reluctance of banks to lend to each other more than doubled since February. While government debt strains in Europe are keeping indicators of credit risk at or near the 10-month highs reached in May, the drop in asset prices is “in the process of bottoming out,” according to Barclays Capital. The easing in bank funding may signal concerns of another credit-market seizure are overblown, said Aviva Investors’ John Hawley. “Libor mitigates some of the fears investors have,” said Hawley, who helps manage $19 billion of investment-grade credit as a senior money manager at the investment firm in Des Moines, Iowa. “The fact it has flattened recently indicates that financial markets are functioning normally.” The extra yield investors demand to own corporate bonds rather than government debt is rising at a slower pace. Spreads rose 3 basis points last week to 196 basis points, or 1.96 percentage points, after soaring 44 basis points in May, the most since at least November 2008, according to Bank of America Merrill Lynch’s Global Broad Market Corporate Index. Average yields fell to 4.05 percent from 4.06 percent on May 28. Sales, Loans Elsewhere in credit markets, corporate bond sales fell in a holiday-shortened week, prices of leveraged loans were little changed after the biggest monthly drop since November 2008 and emerging-market bonds declined amid concern Hungary may default after an official there said June 4 the economy is in “a very grave situation.” Credit-default swaps indexes rose. “Markets remain very nervous and sentiment is fragile, but we believe risky assets are in the process of bottoming out,” Barclays fixed-income strategists led by Ajay Rajadhyaksha in New York wrote in a June 4 note to clients. The firm’s economists boosted their estimates of U.S. gross domestic product growth for 2010 to 3.6 percent from 3.4 percent, citing gains in the labor market, private consumption and investment. U.S. corporate profits rose 31 percent last quarter from a year earlier, the most since 1984, Commerce Department data released in Washington two weeks ago showed. Growth Outlook Earnings surged as fast only six times in the past 60 years, according to Barclays Capital. Each of those periods was followed by GDP growth of at least 3 percent the following year. The last time it happened, in 2004, the economy expanded 3.6 percent, from 2.5 percent in 2003, and yield spreads on company bonds narrowed to an average of 138 basis points from 171. “I’m generally bullish,” said Kevin Mathews, head of high-yield portfolios at F&C Investments in London, who helps manage 1.5 billion euros ($1.8 billion) of assets. “Fundamentals point to continued economic recovery. Eventually new issues will come back. My bet is sooner rather than later.” Corporate bond sales declined to $15.6 billion last week, compared with $18.3 billion in the prior period, according to data compiled by Bloomberg, amid holidays in the U.S. and U.K. Prices of high-yield, high-risk loans were little changed last week at 88.93 cents on the dollar, after tumbling 3.61 cents in May, based on the S&P/LSTA U.S. Leveraged Loan 100 Index. May’s drop was the most since the index plunged 7.6 cents to 63.20 cents in November 2008. Four institutional loan deals were completed last week, bringing this year’s volume to $55.2 billion, compared with $38.2 billion in all of 2009, according to New York-based JPMorgan Chase & Co. Bond Risk Benchmark indicators of credit risk in Asia rose the most in almost two weeks after Hungarian officials compared their nation’s finances to Greece and employers in the U.S. hired fewer workers in May than forecast. The Markit iTraxx Asia index of 50 investment-grade borrowers outside Japan, which investors use to hedge against debt losses or to speculate on creditworthiness, rose 12 basis points to 148.5 basis points as of 8:24 a.m. in Singapore, according to Deutsche Bank AG. That’s the biggest jump since May 25, prices from CMA DataVision in New York show. Bond risk gauges in the U.S. and Europe rose for the week. The Markit CDX North America Investment Grade Index increased 8.6 basis points to a mid-price of 125.75, the highest since May 26, according to Markit Group Ltd. The Markit iTraxx Europe index of 125 companies with investment-grade ratings jumped 10 to 127.5, the highest since May 25. ‘Very Grave Situation’ The indexes typically rise as investor confidence deteriorates and fall as it improves. The contracts 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. Hungary’s economy is in a “very grave situation” because the previous government manipulated figures and lied about the state of the economy, Peter Szijjarto, a spokesman for Hungarian Prime Minister Viktor Orban, said at a news conference in Budapest on June 4. A day later, the government said Hungary’s economic situation is stable and pledged to stick to the budget deficit goal approved by the country’s creditors. The cost of insuring Hungarian sovereign debt against losses rose 102 basis points to 410 basis points on June 4, capping an increase of 168 for the week, CMA prices show. U.S. Payrolls U.S. payrolls rose by 431,000 last month after an increase of 290,000 in April, according to Labor Department figures. The gain was smaller than the 536,000 median forecast in a Bloomberg News survey of 82 economists. The unemployment rate fell to 9.7 percent as Americans dropped out of the labor force. “We’re still a couple of steps away before the market feels comfortable and we need to see some financial unsecured senior issuance to signal some stability,” said Ben Bennett, who helps manage the equivalent of $125 billion of corporate bonds as a credit strategist at Legal & General Investment Management in London. In emerging markets, the extra yield investors demand to own corporate debt instead of government securities widened 11 basis points for the week to 332, according to JPMorgan’s EMBI+ Index. Spreads have tightened from this year’s high of 346 basis points on May 20. Argentine Bonds Argentine bonds fell for the first time in three days on June 4 as concern about the global economic recovery and Europe’s debt crisis weakened demand for higher-yielding, emerging-market assets. The yield on Argentina’s 8.28 percent dollar bond due in 2033 rose 40 basis points, the most in two weeks, to 12.97 percent. The price fell 2.17 cents to 65.13 on the dollar. The notes from Spectrum yield 9.75 percent, or 687 basis points more than similar-maturity Treasuries, Bloomberg data show. The sale was the first by a speculative-grade issuer since DriveTime Automotive Group Inc. of Phoenix issued $200 million of securities on May 27. It was the biggest since Canonsburg, Pennsylvania-based Mylan Inc., the largest U.S. maker of generic drugs, sold $1.25 billion of notes on May 12. Spectrum, which is acquiring small-appliances manufacturer Russell Hobbs Inc., boosted the size of the note sale by $250 million and cut a planned term loan maturing in 2016 by the same amount while increasing its interest rate and widening the discount from face value, a person familiar with the talks said. Dry Spell Moody’s Investors Service rated the notes B2, five steps below investment grade, and Standard & Poor’s graded them an equivalent B. High-yield debt is rated below Baa3 by Moody’s and lower than BBB- by S&P. Before Spectrum’s sale, high-yield borrowers hadn’t issued debt in four consecutive trading sessions, the longest streak since the week ended Feb. 19, when sales halted after Greece revised down its GDP data for the first three quarters of 2009. Some investors are being lured back into the junk market after yield spreads climbed to the highest levels since the end of 2009. The extra yield investors demand to own junk bonds instead of Treasuries climbed 24 basis points last week to 714, Bank of America Merrill Lynch index data show. “We’re constructive on the value proposition of high-yield right now,” said Paul Scanlon, team leader for U.S. high yield at Boston-based Putnam Investments LLC, which manages $53 billion in fixed income. “You’re looking at spreads that are 700 basis points off of Treasuries, defaults that continue to decline, first-quarter earnings that have generally been pretty favorable as we evaluate issuers, and in an economy that continues to be in a moderate recovery.” Libor Tempered Concern that European leaders won’t be able to prevent a default by Greece or other debt-laden nations pushed three-month Libor to 0.53844 on May 27, the highest level since July 6, according to data from the British Bankers’ Association. The rate narrowed to 0.53656 at the end of last week. The difference between Libor and the overnight indexed swap rate -- a gauge of banks’ reluctance to lend known as the Libor- OIS spread -- widened 1.2 basis point last week to 31.2 basis points, the smallest increase since the period ending April 23. It surged to 364 after the collapse of Lehman Brothers Holdings Inc. in September 2008. Europe’s fiscal crisis, proposals in U.S. Congress to limit risk-taking by banks and the biggest oil spill in U.S. history in the Gulf of Mexico, may temper any rally, said Colin Robertson, managing director of fixed income for Northern Trust Global Investments in Chicago. “The fact that liquidity has dried up would lead me to believe most participants are going to be cautious and for that reason nothing jumps out at me right now for being cheap,” Robertson said. “If the market starts to turn and the liquidity’s not there, everything is going to come down.” To contact the reporter on this story: Shannon D. Harrington in New York at sharrington6@bloomberg.net; Sapna Maheshwari in New York at sapnam@bloomberg.net

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