By Bryan Keogh, Emre Peker and Caroline Hyde Jan. 25 (Bloomberg) -- Corporate bond sales are falling and borrowing costs are increasing for the first time in eight weeks amid investor concerns about the pace of the economic recovery. Bond sales worldwide fell 52 percent last week to $48 billion from $99.8 billion in the previous period, according to data compiled by Bloomberg. So-called yield spreads widened for the first time since the five days ended Nov. 27, based on Bank of America Merrill Lynch’s Global Broad Market Corporate Index. Reports showed U.S. retail sales and housing starts unexpectedly declined in December, while German investor confidence dropped more than economists estimated this month. President Barack Obama’s plan to limit the size of banks raised investor concerns that earnings growth may be curbed. Dallas- based Energy Transfer Equity LP, which controls the third- largest U.S. pipeline partnership, pulled a $1.75 billion high- yield offering and Vietnam delayed a sale to this week. “The market feels as though it had lost sight of reality, with the indiscriminate buying of risk while ignoring the economic fundamentals,” said Simon Ballard, the head of European credit strategy at RBC Capital Markets in London. “The wider macroeconomic picture and a couple of recent events have made investors sit back a bit and take stock.” Swaps, Mortgages Elsewhere in credit markets, the cost to protect U.S. investment-grade bonds from default has climbed eight straight days, the longest stretch since June 2008. Interest-rate swap spreads are the widest this year and sales of floating-rate notes are plunging. The U.S. Treasury Department is asking bond dealers about the potential market impact from the end of the Federal Reserve’s mortgage-backed securities purchase program. The extra interest investors demand to own corporate bonds widened 3 basis points last week to 164 basis points, or 1.64 percentage points, after shrinking almost 30 basis points in the previous six weeks, the Bank of America Merrill Lynch Global Broad Market Corporate Index shows. Spreads on emerging-market debt widened 15 basis points last week to 2.99 percentage points, after expanding 19 basis points in the previous five-day period, according to JPMorgan Chase & Co.’s Emerging Markets Bond Index. Vietnam’s government delayed a $1 billion bond sale because of volatility in global markets, three people briefed by bankers arranging the offering said. Markets ‘Stuttering’ “The primary markets are stuttering with new issues failing to gain any momentum,” Suki Mann, a credit strategist in London at Societe Generale, said in a Jan. 22 report. New York-based Morgan Stanley, the world’s biggest brokerage, sold $4 billion of 5-year and 10-year notes on Jan. 21 after boosting spreads by 10 basis points, amounting to about $4 million a year in extra interest costs. The spread on the 10- year security widened about 1 basis point after the debt traded in the public market, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. Yields on two-year Treasury notes fell to a one-month low of 0.79 percent on Jan. 22 as investors shunned riskier assets. Futures traders pared bets on the odds of a Fed rate increase by June to 18 percent, the lowest in at least six months. Obama proposed limits on risk-taking by financial companies last week, including banning banks from proprietary trading, as part of an effort to prevent another financial crisis. China’s central bank may raise rates after May to cool an economy that expanded 10.7 percent in the latest quarter, Zhu Baoliang, an economist at the government’s State Information Center, said in Beijing on Jan. 22, according to the text of his speech on the hexun.com Web site. Rally ‘Derailed’ Expectations that the rally in credit markets would continue “have been derailed over the last couple of weeks,” Citigroup Inc. strategists led by Mikhail Foux in New York said in a Jan. 22 report. “Increasingly, markets have been wobbling from one bad headline to the next -- sovereign risk in Europe, policy tightening in China, new regulation of banks, and a relatively uninspiring start to the earnings season.” Floating-rate debt, which jumped to 18 percent of the total in the first two weeks of the year, dropped to 5.3 percent last week as investors saw little need for protection against rising benchmark rates, Bloomberg data show. Seat Pagine Gialle SpA, the Italian telephone directories publisher, cut the size of a bond offering by 100 million euros ($142 million) from 550 million euros and dropped a plan to sell a portion with a floating rate, according to a banker involved in the transaction. ‘Natural Correction’ “We saw the primary market come out of the box incredibly quickly at the beginning of the year, with plenty of demand for new issues and spread tightening in the secondary market,” said Mark Lewellen, the London-based head of corporate origination at Barclays Capital. “We’re now seeing a natural correction as investors pause amid some volatility in the market, but we don’t expect this to be prolonged.” 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, increased 12.7 basis points last week to 96.2 basis points, according to broker Phoenix Partners Group. The rising streak is the longest in more than 18 months. The Markit iTraxx Crossover Index of credit-default swaps on 50 European companies with mostly high-yield credit ratings climbed 35 basis points last week to 448, JPMorgan prices show. That’s the biggest weekly rise since the index series started in September, according to CMA. In Asia, the Markit iTraxx Asia Ex-Japan IG index rose 4 basis points to 110.5 basis points today, Deutsche Bank AG prices show. That’s the highest since Dec. 1, according to CMA prices. Treasury Watching Treasury is watching for market disruptions as the government prepares for a second consecutive year of record borrowing to fund $1 trillion-plus budget deficits. “The Federal Reserve has frequently stated that its purchases of agency mortgage-backed securities and agency debt will be executed by the end of the first quarter of 2010,” the Treasury told the dealers in a Jan. 22 survey. “Going forward, what impact, if any, will this have on fixed-income markets, and financial markets more broadly?” the Treasury asked. The difference between yields on Washington-based Fannie Mae’s current-coupon 30-year fixed-rate mortgage bonds and 10- year Treasuries widened about 0.05 percentage point last week to 0.74 percentage point, according to data compiled by Bloomberg. That’s up from a 17-year low of 0.66 percentage point on Jan. 6. ‘Still Positive’ “The technicals in the credit market are still positive: balance sheets are strong, liquidity is good, the markets are open and there’s a lot of new money looking for good assets and good stories,” said Jason Quinn, the co-head of high-grade and high-yield flow trading at Barclays Capital in New York. “We just have to get through this repricing. The market has deleveraged substantially, so the probability that we get a massive repricing is low.” Investor concern is showing up in the market for interest- rate swaps. Five-year swap spreads have increased to the most this year, with the difference between interest-rate swap rates and five-year Treasuries at 33 basis points. Swap rates are typically higher than sovereign yields to reflect the extra risk of trading with a bank instead of the government. To contact the reporters on this story: Bryan Keogh in London at bkeogh4@bloomberg.net; Emre Peker in New York at epeker2@bloomberg.net; Caroline Hyde in London chyde3@bloomberg.net

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