Market Spotlight: Corporate bonds revive

NEW YORK (AP) - NEW YORK (AP) -- A drowsy corporate bond market roused itself this week, animated by the Federal Reserve's attempt to stimulate the economy with a dramatic half-percentage point cut in benchmark interest rates.

"The corporate bond market is open for business again, after not being open for awhile," said Joe Balestrino, a senior fixed-income portfolio manager at Federated Investment Management. "I wouldn't call it a frenzy, but if you are a corporate Treasurer, this isn't a bad time to buy. I would call it a vibrant market."

The corporate bond market's sudden revival coincided with a massive equities rally that also followed the Tuesday announcement of the first reduction in the Fed funds rate in four years. By contrast, the risk-averse Treasury bond market suffered a severe selloff after the news.

"The difference is that stocks and corporate bonds focus on growth and Treasurys focus on inflation," Balestrino said.

A rate cut in essence makes money cheaper, and the hope is that it will stir economic growth in such varied venues as consumer purchasing, jobs creation, corporate investment and building construction.

But less expensive money also tends to tempt sellers to lift their prices, stimulating inflation.

"For the near-term, the corporate market is just focused on getting liquidity back," said John Atkins, a corporate bond analyst with Ideaglobal.com. "And the spigots have been opened for liquidity."

The usually boisterous corporate bond market all but dried up in early August as investors, rattled by the below-prime mortgage crisis, suddenly shunned the debt of corporate America altogether.

Not only did the market for risky, high-yield junk bonds evaporate, it became much tougher than usual to sell corporate bonds with high, investment grade ratings.

From the start of August until this week, the only junk bond deal to get priced was a foreign deal, a dollar-denominated $1.5 billion offering by Saudi Basic Industries Corp., according to Ideaglobal.com's Atkins. The abandonment of the junk bond market in August clogged the vigorous deal flow in the leveraged buyout market.

But this week saw a number of deals in both the junk bond and investment grade spheres. For example, there was a $1 billion sale of 10-year junk notes by Yellow Pages Publisher R.H. Donnelley. Unexpectedly brisk demand enabled R.H. Donnelley to increase the size of the deal, previously intended to be just $650 million.

"These were the first pricings for U.S. companies in six weeks in the junk market," said Atkins. "That's a welcome sign though it hardly says that things are back to normal. There is at least a sense that markets are functioning, and that is a relief."

The pace of issuance this week quickened for investment grade debt deals, although that market began reviving in early September. This week the London interbank rate, used to price many corporate deals, also was slashed a half point, giving fresh stimulus to the investment grade market.

General Electric Corp., Lehman Brothers Holdings, J.P. Morgan and the Canadian National Railway were among the investment-grade issuers who rushed to market this week.

Federated's Balestrino said he was especially encouraged that the Lehman Brothers offering went well, given that the brokerage's name earlier in the year was tainted by its exposure to the below-prime mortgage sector. "This is a good example of how quickly a recovery can take place," he said. "Earlier Lehman had been the scourge of the market."

Yet Balestrino predicted that there will be further rockiness for the corporate bond market as the year drags on. "I would be hard pressed to say that all it takes is a 50-basis points cut, and the world is suddenly a better place," he said.

Sustained weakness in housing and some likely weak fourth-quarter earnings reports are likely to shake the corporate bond market in coming months, according to Balestrino.

"But for now the rate cuts have enabled the market to snap back," he said.