By Gabrielle Coppola and Bryan Keogh Jan. 22 (Bloomberg) -- The rally in corporate bonds that drove U.S. borrowing costs to two-year lows is sputtering after President Barack Obama unveiled plans to rein in trading by banks and concerns about the economy grew. The extra yield investors demand on corporate bonds instead of Treasuries widened to 272 basis points from the low this year of 266 basis points, or 2.66 percentage points, on Jan. 14, according to the Bank of America Merrill Lynch U.S. Corporate & High Yield Master Index. The last time spreads widened this fast was in November, when Dubai said state-controlled companies would reschedule debt payments, roiling world markets. Morgan Stanley boosted yields on a $4 billion bond sale yesterday as Obama’s proposal to curb risk-taking on Wall Street threatened to limit profits as U.S. banks recover from $1.13 trillion in writedowns and credit losses. Energy Transfer Equity LP canceled $1.75 billion of notes, citing “market conditions over the past several days” after government reports showed an unexpected drop in jobs. “There’s some allocation out of risk-seeking assets into risk-averting or risk-free assets,” Chris Ahrens, head of interest-rate strategy at UBS AG in Stamford, Connecticut, said in an interview yesterday. “Markets are obviously all reacting to what Obama has to say.” Elsewhere in credit markets, interest-rate swap spreads expanded and emerging market bonds tumbled. Credit-default swaps show investors are growing more concerned about the risk of companies failing to pay their debt. Swap Spreads High-yield bonds issued by paper companies continue to plunge. Fitch Ratings said losses on commercial real estate will probably lead to more downgrades than upgrades among life insurers this year. Two-year interest-rate swap spreads grew to the widest in two weeks yesterday as Treasuries rallied after a government report showed initial jobless claims in the U.S. rose by 36,000 to 482,000 in the week ended Jan. 16, the highest level in two months. The difference between two-year interest-rate swaps and similar-maturity Treasuries rose as much as 1.7 basis points, to 29.4 basis points, the widest since Jan. 7, as the drop in government yields outpaced the decline in the rate to convert fixed payments to floating. Spreads on corporate bonds globally rose 1 basis point to 162 yesterday, the most since Jan. 8, another Bank of America index showed. The rally in Treasuries reduced yields in the global corporate bond index to 4.04 percent on average from 4.06 percent. Morgan Stanley Bonds In the U.S., borrowing costs are rising from the lowest levels since November 2007, the indexes show. The average spread on U.S. bank debt has risen to 229 basis points from 224 basis points Jan. 11, according to Bank of America’s U.S. Corporates, Banks index. Morgan Stanley sold $2 billion of 5-year notes at a price to yield 175 basis points more than similar-maturity Treasuries and $2 billion of 10-year debt at a premium of 190 basis points, according to data compiled by Bloomberg. The spreads rose by 10 basis points as the New York-based company marketed the debt. Obama’s plans to reduce trading that the White House defines as not for the benefit of customers, as well as restrictions on investing in hedge funds and private companies, may raise borrowing costs for financial firms, said Pri De Silva, a bank and brokerage analyst at debt research firm CreditSights Inc. in New York. ‘Unintended Consequences’ “All these regulatory actions could cause unintended consequences, including a greater perception of risk related to government intervention in the financial sector,” De Silva said. “That could cause spreads to widen.” Credit-default swaps on the Markit CDX North America Investment-Grade Index Series 13, which is linked to 125 companies and used to speculate on creditworthiness or to hedge against losses, rose 5.75 basis points to 90.25 basis points yesterday, its highest since Dec. 17, according to CMA DataVision prices. An increase in the index signals a decline in investor confidence. Obama’s announcement caused the index to reverse an earlier decline, said Rizwan Hussain, a U.S. credit strategist at Morgan Stanley. The gauge has risen for seven straight days, CMA prices show. Contracts on Goldman Sachs Group Inc., the most profitable securities firm in Wall Street history, rose 22 basis points yesterday to 122.5 basis points, the highest since Sept. 10, CMA prices show. Swaps on the New York-based bank had fallen to a mid-price of 95 basis points earlier in the day after posting record earnings that beat analysts’ estimates. Energy Transfer Cancels Credit-default swaps linked to Morgan Stanley, whose earnings missed analysts’ estimates on Jan. 20, rose 16 basis points to 133.5 yesterday. Contracts on Citigroup Inc. increased 11.75 basis points to 189.75, those on Bank of America Corp. advanced 7.7 basis points to 120 and JPMorgan Chase & Co. gained 12.5 basis points to 53, CMA prices show. Energy Transfer, which controls the third-largest U.S. pipeline partnership by market value, canceled plans announced Jan. 20 to issue $1.75 billion in notes to repay loans. “Due to market conditions over the past several days, Energy Transfer Equity has opted to not move forward with the contemplated debt offering at this time,” the Dallas-based company said in a statement. NewPage Tumbles NewPage Corp. bonds continued to fall three days after the Miamisburg, Ohio-based producer of coated paper for magazines said that fourth-quarter sales likely fell and its net loss widened. The $800 million of 10 percent notes due May 2012 dropped to 64.5 cents on the dollar yesterday, from 69.5 cents a day earlier and the high this year of 87 cents on Jan. 7, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. Blockbuster Inc., the largest U.S. movie-rental chain, plummeted after the Dallas-based company said earnings before interest, taxes, depreciation and amortization will be $195 million to $205 million for the year ended Jan. 3, according to a statement. Analysts projected $245.4 million, the average of five estimates in a Bloomberg survey. The company’s $300 million of 9 percent debt due September 2012 tumbled 29.625 cents on the dollar to 32.25 cents, according to Trace. “Blockbuster’s poor performance highlights our concern about longer term trends,” Kim Noland, an analyst with Gimme Credit LLC in New York, wrote yesterday in a report. “We have cautioned that its in-store, bricks-and-mortar model is a dinosaur.” Insurer Ratings U.S. life insurers may face $15 billion in additional commercial real estate losses, most of which will be recognized in the next two years, Fitch said. The ratings company said it expects to keep a “negative” outlook on the industry for at least the first half of this year. Insurers booked about $5 billion in such losses since the economic crisis began, bringing the expected total to $20 billion, Douglas Meyer, a Fitch analyst, said yesterday in an interview. Emerging market spreads reached 296 basis points yesterday, up from the low this year of 263 basis points on Jan. 11 and the most since Dec. 18. BRF Brasil Foods SA, the country’s biggest food processor, sold $750 million of bonds after boosting the offering by 50 percent. The Sao Paulo-based company sold 10-year bonds to yield 7.375 percent, down from initial guidance of 7.625 percent. Brasil Foods, formed by the merger of Perdigao SA and Sadia SA last year, joins a push by Latin American companies locking in lower borrowing costs. Banco do Brasil SA, Latin America’s biggest bank, Chilean generator Colbun SA and Cemex SAB, the largest cement maker in the Americas, tapped international debt markets this month. To contact the reporter on this story: Gabrielle Coppola in New York at gcoppola@bloomberg.net; Bryan Keogh in London at bkeogh4@bloomberg.net

Source