Corporate bond crisis grows amid credit fears By Aline van Duyn in London and Joshua Chaffin in New York Published: October 11 2000 19:43GMT | Last Updated: October 12 2000 01:11GMT

Corporate bond spreads in the US and Europe widened sharply on Wednesday as credit concerns moved beyond the telecoms sector to infect nearly every other market.

Some analysts compared the crisis with the one that swept credit markets in late 1998, following Russia's default. The main difference, however, is that bonds issued by industrial companies have been worst hit. In 1998, it was bank credit.

"We are seeing a broad-based shedding of risk," said Evan Kalimtgis, a strategist at Credit Suisse First Boston in London. "The best example of this is the 20 basis point widening in tobacco bond spreads, even though there has been no tobacco-specific news."

Bonds have been dented by several recent events, such as earnings shortfalls.

But these credit quality issues appear to have taken on increased resonance with investors because they are coming against a backdrop of other concerns, including slower economic growth, a weak euro and high oil prices.

The increased volatility in the equity markets is another sign of the rising risks faced by companies, and bond investors are starting to re-price their investments.

"It's a quasi-panic," said Steven Zamsky, a strategist at Morgan Stanley Dean Witter in New York. "You've got a crisis of confidence going on in the market right now."

The spread over Treasuries for Morgan Stanley's corporate bond index widened 13 basis points last week, and was estimated to be another 10 basis points wider early on Wednesday.

In the euro-zone market, the Credit Suisse First Boston index of industrial corporate bonds has widened to about 120 basis points over government bond yields, close to its widest level ever reached.

Losses began last week after Owens Corning filed for bankruptcy, dragging down the bonds of other companies with asbestos liabilities. But the worst losses in the US have come in the high yield telecoms sector. After accounting for the lion's share of new issuance in junk bonds in recent years, telecoms paper has suddenly become unsaleable to investors.

It seems the glut of issuance has made investors question the companies' business plans. "The telecoms bubble is definitely bursting," one syndicate official said.

Traders said spreads on bonds in the banking sector, until now one of the best performing sectors, had widened by 10-15 basis points on Wednesday due to concerns about their exposure to speculative telecoms paper.

In a memo sent to managing directors at Deutsche Bank, whose shares have been hit by these concerns, Edson Mitchell, head of global markets, said that despite turbulence in the high yield market the bank was "continuing to increase market share during this difficult period".

http://markets.ft.com/ft/gx.cgi/ftc?pagename=View&c=Article&cid=FT3HLZUE7EC&live=true&tagid=IXLTEW9YICC&subheading=bonds

-- Martin Thompson (mthom1927@aol.com), October 14, 2000

Answers

That 120 basis points spread between corporate bonds and treasurys is most worrisome. There's got to be a lot of junk bonds in there, not identified as such.

-- JackW (jpayne@webtv.net), October 14, 2000.