New deals halt, expected to resume as year end nears, 10-year note demand inverts spreads; broad market eases

By Andrea Heisinger and Paul Deckelman

New York, Nov. 19 - The primary market had an abrupt slowdown Wednesday, a day after a flurry of new issues was priced.

It was a combination of factors that led to the halt of deals pricing, sources said, although it's likely issuers will again come into the market in the two remaining days this week.

In the investment-grade secondary market Wednesday, advancing issues led decliners by around a five-to four ratio. Overall market activity, reflected in dollar volumes, was down nearly 12% from Tuesday's pace.

Spreads in general were seen considerably wider, in line with sharply lower Treasury yields; for instance, the yield on the benchmark 10-year issue fell by 21 basis points to 3.32%.

Traders saw generally easier levels - but noted that no specific names stood out. Citigroup's bonds, for instance, did not gap out notably, even though the embattled financial giant had yet another dose of bad news for its investors.

Issuers pull back

Companies looking at the new issue market opted not to price Wednesday amid a mix of economic news and after a steady stream of pricings in the past several days.

The stock market sunk by the close, at least partly due to the fading chances of a government bailout of the auto industry. This negative news was coupled with a report that showed a steep drop in consumer prices for October.

But this wasn't all that led to a dry day for new issues.

"There was also the market tone," a source said, adding that the market was still absorbing recent issues.

Companies will be lured back to the market, some out of necessity.

"The days before the end of the year are lowering," a source said. "Day by day we're getting closer. Issuer are going to come [to the market] out of need."

There is some regrouping to be done, he said.

"Most new issues have seen a lack of interest in the five-years. [Companies] are reluctant to do a 30-year tranche.

The last company to price a 30-year bond was Altria Group Inc. during its massive $6 billion issue in three tranches on Nov. 5.

Spreads remain inverted

The trend of spreads between five and 10-year tranches being inverted began at the beginning of November.

When the Altria deals priced its deal of five-, 10- and 30-year notes, they all priced at the same spread of Treasuries plus 600 basis points.

The following week, on Nov. 12, Duke Energy Carolinas LLC priced an issue where the spreads were clearly inverted.

Since then, five more issuers pricing multiple tranches have seen the inverted spreads. The most recent was Tuesday's issue of five- and 10-year notes from Verizon Wireless.

A source close to some of these deals said this phenomenon is a result of catering to issuer and investor wants.

"Investors are looking at the duration of spreads or the total coupon," he said. "Issuers are looking at the spreads and yields on the final year."

The inverted spreads are intended to attract more issuers into doing a five-year tranche, he added.

"There's also getting the proper books done, finding a balance."

Banking and financial issues easier

With financials leading the way downward as stocks slid on Wednesday, a trader saw banking and financial bonds "definitely weaker," in line with the plunge in the sector's shares, but added that he was "not seeing a lot quoted right now, because it's all pretty fresh, happening even as we speak."

He saw General Electric Capital Corp.'s bonds "definitely anywhere from 10 to 15 to 20 [basis points] wider, depending on the one you're looking at."

He said the company's benchmark 2018 notes had been trading at a spread over comparable Treasuries of 355 bps. That bid, he said, got hit, pushing the issue to offered levels around 365 to 370 bps over.

"So things are definitely 10 bps to 15 bps cheaper on something as go-go as that."

While he did "not see a lot [of other names traded], generically it was 5 bps to 10 bps cheaper, across the board."

No erosion in Citigroup

He said that "I don't see anything outpacing anything else," in terms of Citigroup's bonds falling more than the other names in the sector, even though the beleaguered New York-based banking giant, which this week announced that it will cut 53,000 jobs worldwide in order to bring its bloated expenses in line with its revenues, had fresh bad news for its investors.

Citi said Wednesday that it would buy $17.4 billion in assets remaining in structured investment vehicles - which had been among the earlier investments to implode when the global credit crunch began last year.

Citi was one of the leading names in an overall downturn in financial equities, plummeting $1.96, or 23%, to $6.40 on the New York Stock Exchange - a 13-year low. The shares have swooned 33% so far this week.

Financials seen mixed

Despite the latest bout of investor angst about the sector, financials were seen generally mixed on Wednesday. Goldman Sachs' 5.50% notes due 2014, for instance, were 20 bps tighter at 530 bps over.

However, Goldman's 5.45% notes due 2012 ballooned out by 71 bps, to the 650 bps mark. J.P. Morgan Chase Co.'s 5.75% notes due 2013 were seen at 480 bps over, a 65 bps widening.

Financials' debt-protection costs rise

In the credit-default swaps market, a trader said the cost of protecting holders of big-bank bonds against a possible default rose by anywhere between 30 bps and 100 bps, with Citi's CDS costs out 100 bps to 325 bps bid, 350 bps offered.

He saw debt-protection costs for major-brokerage paper 30 bps wider on the session.

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