By Bryan Keogh and Gabrielle Coppola Feb. 11 (Bloomberg) -- Investment-grade debt sales are drying up and returns on high-yield bonds have turned negative for the year as investors wait to see whether Europe will bail out Greece. Borrowers in the U.S. and Europe sold $3.94 billion of high-grade securities this week, the least this year and less than 90 percent of the average $52.9 billion, according to data compiled by Bloomberg. Speculative-grade, or junk, bonds in the U.S. have lost 0.09 percent in 2009 after gaining 1.52 percent in January, Bank of America Merrill Lynch index data show. Investors are avoiding credit risk as European Union leaders meet to hammer out an aid package for Greece. While relative borrowing costs in the U.S. remained steady yesterday and prices to insure against defaults fell, Huntsville, Alabama- based telephone service provider ITC Deltacom Inc. canceled a $325 million bond sale, citing “current market conditions.” “Sentiment has turned significantly amid concerns about sovereign deficits and problems surrounding Greece and other peripheral euro-zone economies,” Simon Ballard, a senior credit strategist at RBC Capital Markets in London said yesterday. “For the moment, we’re unlikely to see much in the way of primary market activity as investor sentiment remains fragile and the broad market feeling is one of nervousness.” Junk Bond Losses The extra yield investors demand to own corporate bonds instead of Treasuries narrowed 1 basis point to 170 basis points yesterday, Bank of America Merrill Lynch’s Global Broad Market Corporate Index showed. The spread has widened from this year’s low of 160 basis points, or 1.6 percentage points, on Jan. 14, after narrowing from 443 basis points a year ago. Greece, the most-indebted member of the euro region, triggered a retreat from riskier assets as its swelling budget deficit prompted European Union leaders to consider a bailout. While credit-default swaps in Europe have fallen since August as the economy improved, swaps on Greek debt have climbed, signaling doubts about the region’s recovery. Corporate bonds have returned 1.39 percent this year, according to the Merrill index. Junk bonds lost 1.58 percent so far this month, the most in a year, the bank’s U.S. High Yield Master II Index shows. Elsewhere in credit markets, credit-default swaps suggest company bonds may rebound. The Markit CDX North America Investment Grade Index, used to hedge against losses on corporate bonds or speculate on a borrower’s ability to meet debt payments, fell 0.65 basis point to 101.6 basis points yesterday, according to broker Phoenix Partners Group. A decline shows improved perceptions of credit quality. Leveraged Loans Mortgage bonds guaranteed by Fannie Mae and Freddie Mac fell after the companies said they would increase purchases of delinquent loans from the securities. The Philippines is planning to sell as much as 100 billion yen ($1.1 billion) of Samurai bonds. Software maker Autonomy Corp. raised about 500 million pounds ($785 million) from the biggest sale of convertible bonds in the U.K. this year. Prices of high-yield loans fell for the fifth straight day. The S&P/LSTA U.S. Leveraged Loan 100 Index declined to 88.93, the lowest since Jan. 8 and down from 89.07 the day before. Leveraged loans and junk bonds are rated below Baa3 by Moody’s Investors Service and below BBB- by Standard & Poor’s. Federal Reserve Chairman Ben S. Bernanke said yesterday the central bank may raise the discount rate “before long.” The comments helped push the yield on the benchmark 10-year Treasury note as high as 3.707 percent. The yield, which traded as low as 2.05 percent in January 2009, is used as a benchmark for corporate borrowing costs. The Bernanke comments “worried some as it implied another drop of support for the financials,” Tim Backshall, chief strategist at Credit Derivatives Research LLC in Walnut Creek, California, said in an e-mail. Investors also “are nervous that the sovereign liquidity crisis is far from over,” he said. Sole Seller Sunoco Logistics Partners LP, the Philadelphia-based oil and product pipeline company, is the sole U.S. investment-grade borrower to sell debt this week, issuing $500 million of 10- and 30-year bonds, according to data compiled by Bloomberg. While sales typically decline in February as companies try to avoid selling bonds before releasing year-end earnings, issuance is less than the average $10.3 billion for the same period over the past 10 years, Bloomberg data show. Deals declined by an average of 28 percent between January and February from 2001 to 2009, Bloomberg data show. Following a record start to the year, junk bond offerings may slow after debt issued by Freescale Semiconductor Inc., Appleton Papers Inc. and Stallion Oilfield Holdings Inc. fell in the days after they started to trade. ‘Stuck Spaghetti’ Freescale’s $750 million of 10.125 percent bonds due in 2018 traded yesterday at 98.4 cents on the dollar, down from face value when sold on Feb. 9, according to New York-based brokerage firm RW Pressprich & Co. Appleton’s five-year, 10.5 percent notes tumbled 5 cents on the dollar from their issue price to 93 cents. Houston-based Stallion’s five-year, 10.5 percent bonds dropped 1.6 cent on the dollar in secondary trading to 97.5 cents, RW Pressprich said. “Three months ago, every piece of spaghetti stuck to the wall,” said Jason Brady, a managing director who invests $54 billion at Thornburg Investment Management Inc. in Santa Fe, New Mexico. “Now it seems, the market is more price-sensitive.” Canceled Sales ITC Deltacom was the fourth high-yield borrower in almost four weeks to cancel a sale. New World Resources NV, a Czech- owned coal company, called off its 700 million euro ($964 million) bond offering, citing “negative market volatility,” in a statement distributed yesterday. In India, state-owned lender Bank of India canceled a dollar bond sale citing “current market conditions,” according to a note sent to investors Feb. 9. Bank of Baroda another state-owned lender, last week canceled a bond sale, three people familiar with the matter said at the time. “Everyone’s just trying to get a better feel for globally what’s happening at a macro perspective, that’s the biggest concern right now,” said Sabur Moini, who oversees $1.3 billion of high-yield assets at Los Angeles-based Payden & Rygel. Greece Meeting European Union leaders meeting in Brussels today will probably press Greece to present more detailed budget cuts and stop short of announcing an aid package. Germany and France are leading talks to help Greece under “tough pre-conditions,” said Markus Ferber, a member of German Chancellor Angela Merkel’s bloc in the European Parliament. “If for any reason the EU decides not to commit any cash following the summit, then there will be blood on the walls in the market on Friday,” Gary Jenkins, head of credit strategy at Evolution Securities Ltd. in London, wrote in a note to investors. “They must be aware of that and thus it is an extremely unlikely scenario.” In the mortgage bond market, Freddie Mac, the housing- finance company seized by the U.S. government 17 months ago, said it will purchase “substantially all” loans delinquent by 120 days or more from its home-loan securities. Fannie Mae, also seized by the U.S., said it would do the same. Freddie Mac’s 30-year fixed-rate 6.5 percent securities fell to 107.41 cents on the dollar from a record 108.28 on Feb. 9, on concern by investors that they would lose out on interest payments, Bloomberg data show. Freddie Decision “The decision to effect these purchases stems from the fact that the cost of guarantee payments to security holders, including advances of interest at the security coupon rate, exceeds the cost of holding the nonperforming loans in the company’s mortgage-related investments portfolio,” Freddie Mac said. In Asia, the Philippines may raise as much as 100 billion yen from the sale of Samurai bonds, twice the original plan, according to a person familiar with the matter. The government told investors it plans to sell 10-year notes, its first yen offering since 2001 and the largest-ever, at a yield of between 0.85 percentage point and 0.95 percentage point more than the yen swap rate, said the person, who asked not to be named as he isn’t authorized to discuss the matter. The range has narrowed from as much as 1.1 percentage points last week. Samurai debt rallied for a 10th month in January, the longest winning streak since Nomura Securities Co., Japan’s biggest brokerage, started tracking the market in September 2001. Yen debt sold by international borrowers yields about 161 basis points more than Japanese government securities, down from a record 503 on March 31. Autonomy’s sale of convertible bonds due in 2015 was the first offering of the securities in Europe since Feb. 4, according to Bloomberg data. The notes can be exchanged for stock when the company’s shares rise to 20.6334 pounds, a conversion premium of 35 percent, the Cambridge, England-based company said in a statement. The coupon will be 3.25 percent, in the middle of the range used in marketing. To contact the reporters on this story: Bryan Keogh in London at bkeogh4@bloomberg.netGabrielle Coppola in New York at gcoppola@bloomberg.net

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