http://www.dallasnews.com/business/221838_bonds_23bus.AR.html

Corporate bond market fading fast

Returns start to resemble those in years of recessions

11/23/2000

Bloomberg News

NEW YORK - The last time the U.S. corporate bond market had a year like this - with blue-chip companies such as General Motors Co. gaining and junk bonds dishing up losses - was a decade ago when the economy was contracting.

Young businesses such as Linc.net Inc. that have driven the record U.S. expansion have scrapped bond sales. Investors are skittish because defaults are rising toward the level of the last recession. It's a reversal from 1997 and early 1998, when investor demand drove down junk-rated companies' borrowing costs.

Gains by the highest-rated - or safest - bonds such as International Business Machines Corp. and the exodus from riskier debt owed by newer businesses such as Teligent Inc. suggest the economy could slow more than Federal Reserve policy-makers planned as they ratcheted interest rates to head off inflation.

It "tells you that the odds of a soft landing are less and less likely," said Scott Colbert, who manages $7 billion of bonds at Commerce Bank Investment Management Group in St. Louis.

Investment-grade corporate bonds returned more than 6 percent this year, including price gains and interest, according to a Merrill Lynch & Co. index. By contrast, junk bonds – the lowest-rated corporates - turned in the worst performance of all U.S. debt, posting losses of about 5 percent. The last time there was such a divergence was in 1990.

For junk-rated borrowers that can still tap the bond markets, the rise in yields - which move inversely to prices - raises their costs and threatens to trim profits.

Computer-disk drive maker Seagate Technology Inc. last week boosted the yield on its sale of seven-year notes by as much as a percentage point to 131/2 percent to attract buyers to a sale it had cut by almost half.

Linc.net, a year-old provider of telecommunications and cable infrastructure services, last month shelved a planned sale of $175 million of bonds, citing the market slump. Even well-known though junk-rated businesses such as clothing maker Levi Strauss & Co. scrapped planned sales.

Not all investors say recession is in the cards. To some, the markets have turned too far against riskier borrowers after a rush to buy their debt a few years back.

"I think the market is overestimating the risk," said Scott Grannis, who helps manage $70 billion of fixed-income assets at Western Asset Management Co. in Pasadena, Calif. "I'm in the school that says things are not always the same every time around." Mr. Grannis is currently holding more corporate bonds than the model against which he measures performance.

While the economy slowed in the third quarter, it still ran at an annual pace of almost 3 percent. Inflation, while accelerating, hasn't risen to the levels of 10 years ago. Consumer prices rose 3.4 percent in the 12 months ended in October, less than the 6.4 percent pace of the same period a decade ago.

What's more, the Fed probably will cut interest rates in the months ahead should the risks increase that a slowdown will turn into a recession, say analysts such as John Lonski, chief economist at Moody's Investors Service.

Still, Bill Gross of Pacific Asset Management, who runs the biggest U.S. bond fund - the Pimco Total Return Fund - is avoiding corporate bonds, partly because he sees the potential for the economy to stall.

"Safety is the key from here," he said last month. "What you want are Treasuries ... [and government-backed] securities," including government-sponsored Ginnie Maes, Fannie Maes and Freddie Macs. He recommended buying "anything with triple-A [ratings], even German bonds."

-- (M@rket.trends), November 24, 2000

Answers

The probability increases daily that foreign investors will panic from an as yet unforeseen calamity resulting from the POTUS election mess and will begin to sell off their American holdings.

All it will take to implode is a massive earthquake or terrorist attack or sudden outbreak of war. Investors' psychology is becoming very fragile...

-- dinosaur (dinosaur@williams-net.com), November 24, 2000.