Dec. 21 (Bloomberg) -- Hybrid bond sales are accelerating as a growing number of debt investors seek higher yields and protection from leveraged buyouts, which damage credit ratings.

About $26 billion of hybrids, securities that have characteristics of debt and equity, were sold in the last four months, or 40 percent of this year's $65 billion total, according to data compiled by Lehman Brothers Holdings Inc. Hybrid sales climbed 55 percent from 2005's issuance, Lehman data show.

Investors are buying hybrids sold by New York-based MetLife Inc. and Seattle-based Washington Mutual Inc. because the securities offer yields that are 1 percentage point above senior unsecured securities and the companies are unlikely targets for takeovers that would pile on more debt.

``There is considerable investor appetite to reach for yield in sectors that have relative immunity to leveraged buyouts,'' Edward Marrinan, head of North American credit strategy at JPMorgan Chase & Co. in New York, said in an interview.

Demand for the debt is so strong that JPMorgan, the third- biggest U.S. bank, this month created indexes to track their performance and started a research publication on the securities, Marrinan said. Sales of hybrids will increase by about $10 billion to $80 billion in 2007, he said.

Financial institutions sold more than 75 percent of the hybrids this year, Lehman data show. Banks aren't typically considered likely LBO candidates because they are regulated by the government and their business depends on maintaining top credit ratings. In an LBO, firms typically borrow two-thirds of the money they use for acquisitions, increasing debt loads and lowering credit ratings.

Bondholders have suffered more than $2 billion of losses in 2006 as private equity firms announced a record $657 billion of takeovers, data compiled by Bloomberg show.

`Good Vehicle'

Marrinan forecasts hybrids bonds to gain more than regular debt next year. The extra yield, or spread, investors demand to own hybrids instead of Treasuries may narrow by 20 basis points in 2007 from 132 basis points, while investment-grade bond spreads may shrink by 7 basis points from 82 basis points, Marrinan said on Dec. 18. A basis point is 0.01 percentage point.

``We think they've been a good vehicle and very undervalued for a long time,'' said Gregory Habeeb, who manages $6.25 billion of bonds at Calvert Asset Management in Bethesda, Maryland. ``As they've become more popular, they've become more dear and they've rallied substantially.''

Habeeb said he's bought ``almost every'' hybrid issued, including those sold by MetLife and Minneapolis-based U.S. Bancorp, which sold $500 million of 6.091 percent perpetual debt on Dec. 18.

Hybrids offer higher yields because they rank behind senior bonds for repayment in a bankruptcy. Issuers can defer interest payments without defaulting, and the securities may have no maturity, similar to preferred stock.
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to me, though I am a plain fellow, that we are having another private equity boom, as we had with the vencaps in the late 90s. But here the central banks are causing the boom to flourish further with low rates and burgeoning money supply. The Fed quit publishing M3 data last year.

Alternative sources are still tracking M3, which has been growing at 11% rates, while Kudlows just look at the monetary base and call it stable.

The banks with private equity are trying to buy another expansion in asset prices on the sly.

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By Harris Rubinroit

Dec. 27 (Bloomberg) -- Investors are finding junk bond yields with about half the risk in an unlikely place: the U.S. loan market.

Borrowers with non-investment-grade ratings such as photography company Eastman Kodak Co. and tissue maker Georgia Pacific Corp. pay interest of 7.80 percent on average for loans, a quarter of a percentage point below yields on bonds with similar ratings. The gap is the narrowest in eight years, according to data compiled by Lehman Brothers Holdings Inc.

What makes loans more attractive than bonds to many investors is that they are secured by company assets. Creditors have recovered 71 percent of their principal in a default with loans, compared with 38 percent for speculative-grade, or junk, bonds, Moody's Investors Service says. Unlike bonds, the only way for most individuals to buy loans is through a mutual fund.

``The risk-return of high-yield bonds versus bank debt is out of whack,'' said Tyler Chan, a director of research for San Mateo, California-based mutual fund firm Franklin Resources Inc., who started his career in the lending department at Citibank 30 years ago. ``We are telling our clients to diversify and put some of their investments in bank debt.''

Over the past 10 years loan rates have averaged 2.30 percentage points less than junk bond yields, according to Lehman. The difference was 1.47 percentage points in January.

Pension funds, insurers and individual investors are joining New York-based JPMorgan Chase & Co. and Bank of America Corp. of Charlotte, North Carolina, to provide so-called leveraged loans, which swelled 60 percent to $473 billion this year.
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Jan. 2 (Bloomberg) -- Wall Street's biggest bond-trading firms, confident the Federal Reserve will lower interest rates as the U.S. economy cools, say Treasuries will post the best gains in five years during 2007.

Two-year Treasury notes will return 5.1 percent and 10-year notes will gain 5.4 percent, according to the average forecasts in a Bloomberg News survey of the 22 primary government security dealers, which trade with the Fed.

``We remain steadfastly bullish on bonds for the year,'' said William O'Donnell, head of interest-rate strategy in Stamford, Connecticut, for UBS Securities LLC, a unit of Europe's largest bank by assets. ``There's not enough evidence to suggest our call for a cut in March is too aggressive.''

Treasuries returned 3.1 percent last year, the seventh consecutive annual gain, after the Fed stopped raising its target for overnight loans between banks, according to data compiled by Merrill Lynch & Co. The rally slowed in the fourth quarter, when bonds gained 0.7 percent, after home sales rebounded and consumer confidence rose, reducing expectations the central bank will cut its key rate from 5.25 percent.

Yields on two-year notes, the most closely linked to the Fed's benchmark, will fall to 4.49 percent from 4.79 percent as of 7:40 a.m. in New York today, according to the survey. Ten-year note yields will end 2007 at 4.62 percent, down from 4.69 percent today, the survey showed.
http://www.bloomberg.com/apps/news?pid=20601087&sid=aYn10Wbahj74&refer=worldwide
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Dec. 29 (Bloomberg) -- Maybe 2007 will be the year when we all sell the streets.

I know, I know, states and localities don't actually ``sell'' their toll roads -- in return for a big chunk of cash, private companies such as Australia's Macquarie Infrastructure Group and Spain's Cintra Concesiones de Infraestructuras de Transporte SA lease them for 50, 75 or 99 years, and collect the tolls.

Such transactions have been done in Chicago, in Indiana, and in Virginia, and lawmakers in New Jersey, Pennsylvania and Texas seem to be looking hard at the possibilities.

People still haven't seen enough of these deals to get very comfortable with them. There's a lot of second-guessing going on, as critics scrutinize what it means to enter into one of these lease transactions.

What's holding them up? Just a few years ago, in the summer of 2005, Merrill Lynch & Co. estimated that there were potential candidates for toll-road privatization in 22 states. The problem doesn't seem to be that people believe states and cities can operate toll roads better than anyone else. Instead, what's worrying everyone is: Are we getting the right price for one of the few cash cows we possess?

Something tells me that the tipping point might well be reached in the new year. Put together another two or three multibillion-dollar deals, and public officials will all be wondering why they are in the toll-road business, anyway.
http://www.bloomberg.com/apps/news?pid=20601039&refer=columnist_mysak&sid=aDmGgJWMlM9E

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Jan. 8 (Bloomberg) -- Bennet Sedacca, president of Atlantic Advisors LLC in Winter Park, Florida, recalls being an equity trader during the October 1987 stock-market crash, in which the Dow Jones Industrial Average had its biggest one-day plunge.

He was trying to sell 25,000 shares of a company. ``For four days, no one answered the phone,'' he said. Today, as a manager of $200 million, he is protecting himself. In the last three months he has reduced his holdings of stocks and raised investments in short-term Treasury and other securities on the view that another crash may be coming, two decades later.

``Disasters may be rare, but I see the kind of conditions that could make one happen,'' said Sedacca. ``It's like a big keg of dynamite with a fuse. I don't know when, but I think the conditions exist for the explosion to eventually occur.''

Even as strategists at the biggest banks in the world forecast stock rallies in the U.S., Europe and Japan, disaster scenarios are being spun from New York to Hong Kong. For Sedacca, the potential triggers are the Iraq war, the U.S. trade deficit and the fallout from a glut of global cash.

For Phil Orlando, the chief equity market strategist for Federated Investors Inc., which manages $223 billion, it's the potential for a recession in the U.S. For David Mouser, who helps manage $350 million at Driehaus Capital Management, it's the buildup of debt to finance mergers and acquisitions.

``The single biggest risk facing global financial markets is a change in the benign credit-market conditions prevailing the last three years,'' said Mouser. ``We've had record liquidity in global markets the last few years that has driven all asset classes to continued new highs.''
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Jan. 12 (Bloomberg) -- Emerging-market bond funds received their biggest weekly inflow in a month, suggesting investor demand for riskier assets remains strong even as commodity prices drop and concern about government policies in Venezuela and Ecuador mount.

Mutual funds that invest in debt issued by developing countries took in $580 million during the week that ended Jan. 10, the most since Dec. 13, according to Brad Durham, a managing director at Emerging Portfolio Fund Research Inc. in Cambridge, Massachusetts.

``The commodity concern is one to watch, instead of one to panic about,'' said Ingrid Iversen, who helps manage $500 million in bonds and currencies at Insight Investment Management in London. ``Generally the environment is pretty okay.''

Declines in the price of crude oil and other commodities sold by developing nations have hurt emerging-market bonds the past two weeks. Bonds also fell after Venezuelan President Hugo Chavez said on Jan. 8 he plans to nationalize the country's largest phone company and utilities. Ecuador's president-elect Rafael Correa's threats to default on foreign debt have driven down the Andean country's bonds.

``There's generally good sentiment, despite rumblings from Ecuador and Venezuela,'' Durham said.

The average spread, or margin of extra yield, for emerging- market bonds over similar-maturity U.S. Treasuries narrowed 4 basis points today to 1.70 percentage points at 2:33 p.m. in New York, within 1 basis points of a record low reached last month, according to JPMorgan Chase & Co.'s EMBI Plus index. A basis point equals 0.01 percentage point.
http://www.bloomberg.com/apps/news?pid=20601086&sid=aEflXVG1aF6o&refer=latin_america

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Jan. 23 (Bloomberg) -- The risk premium on high-yield, high- risk corporate bonds fell to the lowest in a decade as a drop in oil prices and surging consumer confidence boosts optimism the U.S. economy will grow fast enough to limit defaults.

Investors demand an extra 2.69 percentage points in yield on average to own junk bonds instead of U.S. Treasuries, the smallest gap since 1997, according to data compiled by Merrill Lynch & Co. The spread has narrowed by a percentage point from a year ago and is below its five-year average of 5.17 percentage points, Merrill data show.

The riskiest borrowers are having little trouble raising money. Aramark Corp., the Philadelphia-based operator of concession stands in arenas including New York's Shea Stadium that had its credit ratings cut twice since August, last week sold $1.78 billion of debt at yields that were as much as half a percentage point less than it proposed.

``It's amazing,'' said David Darst, chief investment strategist at Morgan Stanley Global Wealth Management in New York, which oversees $700 billion in assets. ``There's capital out there searching for yield, and that's what has helped keep things low,'' he said, referring to spreads.

Bonds rated below Baa3 by Moody's Investors Service and BBB- by Standard & Poor's are considered high-yield, or junk. The smaller spreads mean companies are paying about $1 million a year less in interest on every $100 million borrowed.

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Feb. 1 (Bloomberg) -- The REIT mafia made Blackstone Group LP an offer it couldn't refuse.

Investors led by American International Group Inc. forced Blackstone to agree to pay them almost $950 million for $725 million of Equity Office Properties Trust bonds as part of the biggest leveraged buyout ever. Debt holders extracted the premium after turning down bids they said treated some investors unfairly.

``They're called the mafia because they stick together and they don't sell each other out,'' said Robert Haines, an analyst at New York-based debt research firm CreditSights Inc. ``They're not doing anything wrong.''

It was an unusual victory for corporate bond investors, who lost more than $2 billion last year from the surge in LBOs, according to data compiled by Merrill Lynch & Co. and Bloomberg. By working together, the REIT bondholders also pried payments from Blackstone in its acquisition of CarrAmerica Realty Corp., and forced Kimco Realty Corp. to pay more when the company sought permission to reduce restrictions on its borrowing.

The group's success has nothing to do with La Cosa Nostra and everything to do with the language in bond documents that limits the amount REITs can borrow against their assets to 40 percent. Those provisions, demanded by creditors after the real estate market collapsed in the early 1990s, aren't found in other investment-grade securities.
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Feb. 6 (Bloomberg) -- Credit derivatives, the fastest- growing business on Wall Street, are squeezing returns for bondholders to an all-time low.

Contracts that protect investors against defaults are being sold in record numbers and then bundled into securities known as collateralized debt obligations. CDOs are driving down the cost to protect against non-payment so much that even the government of Argentina, which reneged on $95 billion of debt five years ago, is paying less than ever to borrow.

``CDOs are changing the economics of investing in corporate bonds,'' said Lorenzo Isla, head of structured credit research at Barclays Capital in London. ``By expanding the investor base for corporate credit risk, they compress the spreads available to corporate bond investors.''

Bondholders have halved the amount they charge high-risk companies in the past four years to a record-low 2.6 percentage points on average over U.S. Treasury notes, according to data compiled by Merrill Lynch & Co. Investment-grade securities produced the worst returns since 2001 for fund managers from Deutsche Bank AG to Vanguard Group, Bloomberg data show.

CDOs that invest in derivatives of investment-grade bonds return as much as 12 percent a year, three times more than the yields on the underlying notes, according to data compiled by Barclays Capital.

New Strategies

The diminishing returns on bonds prompted WestLB Asset Management to add credit derivatives to some of its $6.5 billion of debt investments.

``Spread levels are very tight in the cash bond universe,'' said Christian Doppstadt at the Dusseldorf-based fund manager. ``You can't really initiate nice trading strategies using only cash bonds.''

The cost for bondholders in Europe to protect 10 million euros ($12.9 million) of bonds for five years dropped to a record-low 188,500 euros today, from as much as 450,000 euros in 2005, according to the benchmark iTraxx Crossover Index of 45 companies with the lowest investment-grade and highest sub- investment grade ratings. In the U.S., the cost has fallen to a record $122,250 for a $10 million contract, down from $174,000 in September.

Sales of CDOs drive down the cost of debt insurance by adding more credit-default swaps to a market that already provides protection on $26 trillion of debt. That's five times more than the $5 trillion outstanding in the global bond market, according to data from the International Swaps and Derivatives Association and Merrill Lynch.

Record Sales

The growth in contracts has outpaced all other parts of the market for derivatives, financial instruments derived from stocks, bonds, loans, currencies and commodities, or linked to specific events like changes in the weather or interest rates.

Banks doubled the amount of CDOs outstanding in the past two years to $2.6 trillion, including a record $769 billion sold last year, according to JPMorgan Chase & Co.

The securities bundle together as many as 200 credit-default swaps, contracts based on corporate bonds and loans that are used to speculate on a borrower's ability to repay debt. Investors in CDOs typically are paid interest every quarter with the money that is received by selling credit-default swaps. CDO prices rise and fall reflecting the fluctuating risk of non-payment.

Higher Returns

CDOs offer higher returns than bonds or individual credit- default swaps because they are tailored to the needs of a wider group of investors from hedge funds to insurance companies. Hedge funds usually buy the riskiest portions that provide the highest potential gains.

Insurance companies looking for a safer investment would buy a AAA-rated portion of the same CDO and earn an average of 50 basis points more than the benchmark London interbank offered rate, or about 5.8 percent. That still beats the 34 basis-point yield premium for bonds with the same credit ratings.

``The use of CDOs and derivatives has added huge pressure on spreads,'' said Jonathan Laredo, founder of Solent Capital in London, which manages $6 billion of CDOs. He expects this year's issuance of CDOs to be similar to last year. ``As long as the money pours in, I see no reason for spreads to widen again.''

The cost for bondholders in Europe to protect 10 million euros of bonds for five years reached a record-low 193,280 euros on Jan. 24, from as much as 450,000 euros in 2005, according to the benchmark iTraxx Crossover Index of 45 companies with the lowest investment-grade and highest sub-investment grade ratings. In the U.S., the cost fell to as little as $123,500 in January, down from $174,000 in September.

Bond Arbitrage

Falling costs for credit-default swaps drive yields lower as investors exploit gaps between the two markets by buying bonds.

Etienne Gorgeon, who manages 5 billion euros at Fortis Investment Management in Paris, says he bought Swedish phone company TeliaSonera AB's bonds in September when the cost of insurance against default declined.

Gorgeon says he's earning about 4.31 percent a year from the bonds, even after buying credit-default swaps to hedge against risk of non-payment. The return compares with a yield of 4.09 percent on similar-maturity government debt.

``It's like a free lunch,'' says Gorgeon. ``You're immune to default.''

Nicole Montoya, who helps manage about $26 billion of assets at AXA Investment Managers in Paris, bought bonds of Altadis SA, the Madrid-based maker of Cohiba cigars and Gauloises cigarettes, when credit-default swaps dropped below yield spreads in October. Montoya says she's receiving 62 basis points a year above benchmark borrowing rates on the bonds and paying 49 basis points for credit-default swaps to limit the risk.
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Feb. 6 (Bloomberg) -- Volatility in U.S. Treasuries fell to a record low as traders abandoned bets the Federal Reserve will cut interest rates by mid-year.

Merrill Lynch & Co.'s MOVE Index, based on prices of over- the-counter options on Treasuries maturing in two to 30 years, fell to 54.9 yesterday, the lowest since 1988, when the firm began tracking the data. The index's decline came after reports showed the U.S. economy is more robust than analysts anticipated, and suggests traders expect narrower price swings in Treasuries in coming months.

``People perceive that the Fed is not going to change rates any time soon,'' said Harley Bassman, a U.S. rates strategist in New York at Merrill, the third-largest U.S. securities firm by market value. ``Moreover, the market isn't moving. These two factors have combined to create this low volatility.''

Volatility in Treasuries has diminished in part because the Fed has become more transparent in signaling policy changes, according to Credit Suisse. Increased stability in Treasuries prices has helped shrink borrowing costs for high-risk companies to the smallest in a decade, Merrill data show. For traders, the drop in volatility reduces opportunities to profit.

Merrill's index implies the yield on 10-year notes will only move 12.5 basis points, or 0.125 percentage point, higher or lower over the next month, said Bassman. The note currently yields 4.78 percent, and has been confined to a 30-basis-point range since the start of the year.

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Feb. 9 (Bloomberg) -- Japan Airlines Corp., the most indebted carrier in Asia, may avoid a cash shortage and return to profit, according to credit-default swaps, which had the biggest weekly drop in more than a year.

The airline is cutting jobs and selling assets after a 47 billion yen ($387 million) loss in the year ended March 2006. The company plans to get a loan from banks to repay some debt, Atsushi Abe, a spokesman in Tokyo, said yesterday. Investors have until Feb. 23 to exercise a right to seek early redemption on Japan Airlines' 100 billion yen of convertible bonds.

``The restructuring and the financing is positive for the company and that's why the credit default swaps have dropped,'' said Jun Ishida, a fund manager in Tokyo at Societe Generale Asset Management, which oversees about $365 billion in assets. He declined to comment on whether he holds Japan Airlines' bonds.

Credit-default swaps, which protect investors from Japan Airlines defaulting, had the biggest drop since December 2005. Contracts based on 1 billion yen of the company's debt fell to 19.3 million yen from 24 million yen on Feb. 2, according to prices from Credit Suisse Group.

The five-year contracts, used to speculate on changes in Japan Airlines' ability to repay 280 billion yen of bonds, fell to a 14-month low as perceptions of creditworthiness improve.

Japan Airlines has the equivalent of $10.5 billion in total debt, the largest of any Asian airline, according to data compiled by Bloomberg. Competitor All Nippon Airways Co. has borrowed $7.2 billion, the second-biggest amount.
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Feb. 15 (Bloomberg) -- Standard & Poor's said it will no longer wait for homes to be foreclosed on and sold for losses before alerting investors in mortgage-backed securities that it expects to lower ratings on their bonds.

The ratings company will now consider issuing downgrade warnings based on the amount of loans that are delinquent, in foreclosure proceedings or already backed by seized property, Robert Pollsen, an analyst at the New York-based firm, said on a conference call today. S&P assumes none of the borrowers more than 90 days late will resume paying their mortgages, he said.

The firm is reacting to rising delinquencies and defaults on the riskiest types of home loans made in 2006. S&P said yesterday it's considering downgrades on 18 low-rated bonds from 11 securitizations of mortgages last year amid early loan problems.

``It is a watershed event'' because it means S&P is now actively considering downgrading bonds within their first year, said Daniel Nigro, an asset-backed securities portfolio manager in New York at Dynamic Credit Partners, a manager of about $6 billion in hedge funds and collateralized debt obligations. ``We welcome them being more open'' about their methods.

The riskiest mortgages made last year are experiencing more delinquencies than ones from previous years at comparable ages, following a period in which some companies lowered lending standards to attract business and home-price growth slowed from record levels in many regions. S&P's warnings yesterday were on bonds backed by so-called subprime, Alt-A and home-equity loans.
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Feb. 16 (Bloomberg) -- A derivatives index used to bet on bonds backed by the riskiest U.S. mortgages fell for the fourth straight week as more subprime lenders reported losing money.

Prices for credit-default swaps linked to 20 securities rated BBB-, the lowest investment grade, and created in the second half of 2006 fell 2.8 percent to 82.82 this week, and are down 15 percent since being introduced Jan. 18. The decline means an investor this week would have paid more than $950,000 a year to protect $10 million of bonds against default.

The tumble is being exacerbated by hedge funds using the index to make bearish bets and a dearth of investors willing to use them to make bullish bets, said investors such as Dean Smith of New York-based Highland Financial Holdings Group LLC, which manages $2 billion including mortgage bonds. The cost to protect against default using the index was more than two-and-a-half times that to insure individual securities on Feb. 12, Bear Stearns Cos. said.

``We've yet to see the floor on where these things can go,'' said Paul Colonna, a fixed-income manager for Stamford, Connecticut-based GE Asset Management, which oversees $199 billion. ``And it's not based on housing data or performance data'' on mortgages in the bonds.

Falling prices for the ABX-HE-BBB- 07-1 contracts, and ones tracked by other ABX indexes, accelerated last week, as the two biggest subprime home lenders, HSBC Holdings PLC and New Century Financial Corp., said more of their loans were going bad than they expected. Subprime mortgages are made to borrowers with low credit scores or high debt burdens. New subprime loans are experiencing more delinquencies than in at least six years.

`Pure Sentiment'

ABX indexes plunged last week even as typical yield premiums on BBB- bonds remained at about 3 percentage points over the one month London interbank offered rate, according to RBS Greenwich Capital Markets. Typical swap premiums on a single bond rose by $50,000 per $10 million to $400,000, versus a $235,000 rise for ABX premiums to $918,000, according to Barclays Capital.

In the ABX market, ``almost the entire price movement can be blamed on nothing other than pure sentiment-driven selling,'' Bear Stearns analysts led by Gyan Sinha in New York wrote in a Feb. 12 report. Sinha says some of the contracts are too cheap.

Yield premiums on low-rated subprime bonds have widened in the past five months. Spreads on BBB- bonds sold this week were half percentage point higher than for ones sold last week, averaging 3.50 percentage points, the highest since late 2005, Michael D. Youngblood, an analyst at Friedman Billings Ramsey Group, wrote in a report today. Prices on low-rated bonds from the many of the deals weren't disclosed, he wrote.

Spreads on older BBB- bonds widened to 4.25 percentage points today, the highest since December 2005, said Peter DiMartino, a managing director at RBS Greenwich Capital Markets.

San Diego, California-based Accredited Home Lenders Holding Co. said Feb. 14 that it lost money last quarter and it couldn't provide earnings guidance for this year. Also this week, closely held ResMae Mortgage Corp., which filed for bankruptcy protection, and Fieldstone Investment Corp. announced sales.

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February 16 – Bloomberg (Shannon D. Harrington): “The perceived risk of U.S. corporate bonds fell for a sixth straight week after Federal Reserve Chairman Ben S. Bernanke indicated the economy is growing and inflation is under control, according to an index of credit-default swaps. The [CDS price] drop, which indicates improvement in the perception of corporate credit quality, was the biggest in the Dow Jones CDX North America Crossover Index since June.”

February 15 – Bloomberg (Shannon D. Harrington and Hamish Risk): “The perceived risk of owning U.S. and European corporate bonds fell to a record low for the fifth day this month amid speculation that rising U.S. mortgage delinquencies will be contained, according to an index of credit-default swaps.”

February 14 – Bloomberg (Mark Pittman): “Sarbanes-Oxley…is prompting more companies to keep secrets in the bond market. Siemens AG, Australian retailer Woolworths Ltd., Miller Brewing Co….and at least 100 other companies are selling bonds that aren’t registered with the Securities and Exchange Commission instead of debt that requires more disclosure. The securities increased 50 percent in the past two years, five times faster than the rest of the U.S. market, according to data compiled by Lehman Brothers Holdings Inc. ‘It’s a darker world of the bond market,’ said Matthew Eagan, who helps oversee $97 billion in fixed income, including unregistered bonds, at Loomis Sayles…‘It’s off the radar.’”

http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aSeBI1BGA33U

http://www.prudentbear.com/creditbubblebulletin.asp

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By Keiko Ujikane

Feb. 19 (Bloomberg) -- Freddie Mac, the second-largest source of money for U.S. home loans, said ``strong, steady'' demand among Asian investors will support the mortgage-backed bond market.

``You can't help, when you travel through Asia, realizing that the amount of dollar assets that needs to get invested is large,'' said Patricia Cook, the government-chartered company's executive vice president of investments and capital markets. ``There's strong, steady demand for Freddie Mac securities in this area of the world.''

Asian investors increased purchases of U.S. agency debt for a third year in 2006 as they shifted from Treasuries in search of higher yields and returns, Treasury Department data show. Freddie Mac notes returned 4.1 percent last year, the most since 2002, compared with 3.1 percent for Treasuries, according to Merrill Lynch & Co. indexes.

The extra yield, or spread, investors demand to own Freddie Mac's notes over similar-maturity U.S. notes narrowed to 24 basis points on Feb. 16 from 32 basis points six months ago, according to Merrill. A basis point is 0.01 percentage point.

``Demand for dollar assets is going to keep the spreads tight,'' McLean, Virginia-based Cook said in a Tokyo interview on Feb. 16 after meeting central bankers, life insurers and other financial institutions in Beijing, Hong Kong, and the Japanese capital.

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Feb. 23 (Bloomberg) -- Borrowing for schools in North Carolina, sewers in California and state psychiatric hospitals in New York made up the largest municipal bond sales this week, as state and local governments sold $5 billion of debt.

Wake County, home to North Carolina's capital Raleigh and the state's second-biggest school system, sold $455 million of bonds. Sacramento, California's regional sewer utility sold a mix of floating- and fixed-rate securities to save 6 percent through a refinancing. New York's Dormitory Authority sold $422 million of mental-health facility bonds.

Sales of bonds by U.S. states and municipal governments are on a pace to exceed 2005's record amount. Year-to-date issuance of long-term, fixed-rate municipal debt is almost 20 percent ahead of the comparable tally two years ago, according to data compiled by Bloomberg.

``These trends support our full-year supply projection of $415 billion for 2007,'' Matt Fabian, senior analyst at Municipal Market Advisors, wrote in a recent report.

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Feb. 24 (Bloomberg) -- U.S. Treasuries advanced for a fourth straight week, the longest streak since August, as investors sought safety from losses of subprime mortgage bonds.

Yields on benchmark 10-year notes fell near their lowest level in six weeks as the risk of owning bonds backed by mortgage loans to risky borrowers fueled speculation a slowdown in residential real estate will hurt the economy. Yields on interest-rate futures declined as traders increased bets the Federal Reserve will lower rates this year.

``The sting from the subprime market is clearly flowing into the banking system,'' said Michael Cheah, who manages about $2 billion in assets at AIG SunAmerica Asset Management in Jersey City, New Jersey. ``It's going to be good for Treasuries.'

Ten-year note yields fell almost 2 basis points, or 0.02 percentage point, to 4.67 percent. The yield, which moves inversely to price, yesterday touched the lowest since Jan. 10. The price of the 4 5/8 percent security maturing in February 2017 rose 1/8, or $1.25 per $1,000 face amount, to 99 20/32.

Traders are pricing in an 18 percent chance the Fed will cut its benchmark rate by 25 basis points to 5 percent in June, according to futures contracts. That compares with a 7 percent chance on Feb. 13. Traders had priced in a 100 percent odds of a March rate cut as recently as Dec. 5.

An index of credit-default swaps on 20 subprime mortgage bonds with the lowest investment-grade ratings sold in the second half of last year dropped yesterday to a record low for a sixth straight day, as the level of delinquencies and defaults on subprime mortgages made last year is the highest ever for loans of that kind, according to Bear Stearns & Co.

The index fell 7.7 percent yesterday and is down 30 percent since Jan. 18.
http://www.bloomberg.com/apps/news?pid=20601087&sid=aKj_9rlHGS0k&refer=home

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February 23 - Financial Times (David Oakley): “Company default rates among junk-rated debt have fallen to their lowest level in 26 years… Default rates among speculative-grade issues are an important indicator of the health of the world economy, as these are from the weakest companies. Last year, just 1.57 per cent of all junk-rated debt defaulted, down from 1.8 per cent in 2005, Moody’s…said. This level is the lowest in any year since 1981… But in its annual global corporate default study, Moody's warned default rates would almost double to 3.07 per cent by the end of 2007. Although this is still comfortably below the historical average of 4.9 per cent…”

Junk issuers included Huntsman Int. $350 million, American Axle & MFG $300 million, American Railcar $275 million, Esterline Technologies $175 million, and Key Plastics $115 million.

International issuers included Vodafone $3.5 billion, Peru $3.5 billion, and Digicel Group $1.4 billion.

February 22 – Financial Times (Joanna Chung): “A frenzy of investor activity in local bond markets helped send trading volumes of overall emerging market debt to a record high of $6,500bn in 2006… Participants in the survey by EMTA, the principal trade group for the emerging markets trading and investment community, reported that trading volumes rose 19 per cent…Trading in local market instruments hit an all-time high of $3,687bn in 2006, accounting for 57 per cent of overall volume compared with a 47 per cent share in 2005 and 45 per cent in 2004. The figures highlight the increasing shift of yield-hungry investors from dollar and euro-denominated debt to local currency-denominated debt. The surge in overall activity also reflects the growing pool of investors in emerging markets, which now includes central banks, pension funds, life assurance groups and retail investors.”
http://www.prudentbear.com/creditbubblebulletin.asp

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February 22 – Financial Times (Paul J Davies): “Kohlberg Kravis Roberts is used to wielding financial clout in the stock markets, where it has been involved in some of the biggest and boldest leveraged takeovers for years. But in the first months of this year, the firm, along with many of its rivals, is finding that it has ever more power in the debt markets, where private equity sponsors raise the bulk of capital for their deals. This week, KKR is set to close the loan financing for its purchase of a majority stake in PagesJaunes…. Demand among specialist investors for the debt allowed KKR not only to cut the interest it would pay on senior secured loans but also to increase their size. This meant it could chop back heavily on the much more expensive subordinated mezzanine loans it had expected to issue.”

February 21 – Bloomberg (Harris Rubinroit): “Henry Kravis and Stephen Schwarzman never had an easier time getting the lowest interest rates on loans from their bankers. Just three months after borrowing $12.8 billion to pay for hospital operator HCA Inc. in November, Kohlberg Kravis Roberts & Co. and its partners negotiated a new loan with lower rates.”

February 21 – Bloomberg (Larry Edelman): “Providence Equity Partners Inc., a buyout firm focused on media and communications investments, raised $12 billion for its largest-ever fund. Investors include pension funds, university endowments and wealthy individuals, the…firm said… The money was gathered in four months.”
http://www.prudentbear.com/creditbubblebulletin.asp

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March 8 (Bloomberg) -- Jamaica sold $350 million of bonds maturing in 2039, suggesting investor demand is picking up for emerging-market securities after last week's rout.

Jamaica sold the 8 percent bonds to yield 3.46 percentage points over similar-maturity U.S. Treasuries, or about 8.12 percent. The government increased the size of the offering by $100 million from $250 million initially planned. Citigroup Inc. managed the sale.

The sale comes amid a rebound in emerging-market bonds that was sparked by gains in global equity markets. The average yield spread for developing nations' bonds over U.S. Treasuries narrowed 3 basis points today, or 0.03 percentage point, to 1.87 percentage points at 4:20 p.m. in New York, according to JPMorgan Chase & Co.'s EMBI Plus index.

``There are some signs that the risk-aversion concern is over,'' said Adam Weiner, who manages emerging-market debt at New York-based OppenheimerFunds Inc., which has $250 billion under management. ``There wasn't a clear driver for the recent weakness.''

Jamaica's credit rating was affirmed by Standard & Poor's today, citing the country's ``commitment to fiscal discipline and debt reduction.'' S&P rates the country's long-term debt B, four levels below investment grade.

``It's a very well priced issuance,'' said Dario Pedrajo, who manages about $100 million at Kapax Investment Advisers LLC in Miami. He said this morning he had planned to buy some of the bonds.

http://www.bloomberg.com/apps/news?pid=20601086&refer=latin_america&sid=aoFWJjket6t8

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March 8 (Bloomberg) -- Yield premiums on the top-rated bonds backed by subprime mortgages are rising as concern grows that even the supposedly safest of securities may not be immune from surging consumer delinquency rates.

Three-year floating-rate ``home equity'' bonds with AAA ratings last week yielded 19 basis points more than the one-month London interbank offered rate, up 3 basis points from the prior week and the most since January 2006, according to Greenwich, Connecticut-based RBS Greenwich Capital. A basis point is 0.01 percentage point.

Rising defaults on loans to people with poor credit and losses at companies that make the mortgages have investors concerned that the performance of mortgage bonds will suffer. The change in spreads last week was the biggest since November 2005, when they narrowed, said Peter DiMartino, an RBS debt strategist.

``There's fear out there right now,'' said Michael Rieger, an asset-backed portfolio manager in New York at AIG Global Investment Group who overseas $50 billion in mostly top-rated asset- and mortgage-backed bonds.

The concerns about subprime loan delinquencies that have cut into investors' interest in lower-rated bonds backed by the mortgages are ``slowly catching on'' among higher-rated ones, analysts led by Rod Dubitsky at Credit Suisse Group wrote in a report today. Among lower-rated bonds, a widening of spreads that accelerated last month began in October and November.

http://www.bloomberg.com/apps/news?pid=20601009&sid=aDeId1tH0AFk&refer=bond

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March 10 (Bloomberg) -- European two-year government notes posted their biggest weekly drop this year after the European Central Bank signaled it will raise interest rates further.

Benchmark two-year notes fell by the most in four months yesterday after the central bank lifted its refinancing rate to 3.75 percent and ECB President Jean-Claude Trichet said on March 8 that borrowing costs are still ``accommodative.'' Debt also fell this week as equity markets recouped losses from last week, crimping investor demand for the safety of fixed-income securities.

``Trichet was very clear in his remarks that there will be more interest-rate increases,'' said Klaus Schruefer, an economist at SEB AG in Frankfurt. ``Markets are being prepared for the continuation of gradual rate increases and the certainty of another quarter point step in June.''

The yield on the benchmark two-year note, which is the most sensitive to interest-rate expectations, this week gained 10 basis points to 3.94 percent as of 5 p.m. in London yesterday, the most since the five days through Dec. 8.

The price fell 0.15 or 1.5 euros per 1,000 euro ($1,312) face amount, to 99.73. Yields move inversely to prices. The yield on 10-year bunds, which are more sensitive to inflation expectations, was little changed in the week at 3.94 percent.

European bonds fell yesterday after a government report showed employers in the U.S. added more jobs than expected last month, and the unemployment rate fell.

The ECB's decision to raise rates ``was taken in view of the upside risks to price stability in the medium term,'' Trichet said at a press conference in Frankfurt two days ago. ``Given the favorable economic environment, our monetary policy continues to be on the accommodative side."

http://www.bloomberg.com/apps/news?pid=20601085&sid=aL1.2WYQW_RM&refer=europe

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By Caroline Salas and Darrell Hassler

March 13 (Bloomberg) -- Bond investors rattled by mounting losses in subprime U.S. mortgages say trouble is brewing in collateralized debt obligations, the same securities that fueled the boom in leveraged buyouts and cut-rate finance.

Sales of CDOs, which package loans, bonds and derivatives into new securities, rose by almost half to $918 billion last year, according to data compiled by JPMorgan Chase & Co. Demand for investments to use in CDOs has helped push risk premiums lower for everything from home loans to high-yield, high-risk bonds, forcing managers to borrow ever more money to maintain returns and stand out from the competition.

``There will ultimately be a shakeout,'' said Oliver Wriedt, a partner at New York-based GoldenTree Asset Management LP, which oversees about $8 billion and manages CDOs and was founded in 2000. ``Many'' new managers ``lack the pedigree, or at a minimum the track record. Many have not managed'' in a downturn, he said.

Managers of CDOs backed by speculative-grade loans are borrowing as much as 13 times the amount they raise in equity from investors, up from nine to 10 times as recently as late 2005, according to Wriedt. Forty-one percent of the 142 CDOs backed by corporate loans and rated by Moody's Investors Service last year were set up by first-time issuers.
http://www.bloomberg.com/apps/news?pid=20601109&sid=aCITz8HS6ewk&refer=exclusive

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March 19 (Bloomberg) -- The amount of money borrowed from brokerages that do business on the New York Stock Exchange to buy stock rose 3.6 percent to a second straight monthly record, reaching $295.9 billion in February.

Margin debt, as the borrowing is called, in January broke the prior high set at the peak of the so-called Internet bubble.

Changes in the level of margin debt have mirrored those of U.S. stock indexes. After setting an all-time high of $278.5 billion in March 2000, margin debt dropped to less than half that amount by September 2002. It reached $285.6 billion in January.

http://www.bloomberg.com/apps/news?pid=20601084&sid=aVvjWrB8V9I0&refer=stocks

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March 21 (Bloomberg) -- U.S. Treasury notes maturing in two years rose the most in more than a week after the Federal Reserve left borrowing costs unchanged and unexpectedly softened a reference on the need for higher interest rates.

The yield on two-year notes, more sensitive to changes in interest-rate policy than longer-maturity debt, fell below 10- year note yields for the first time since August as speculation increased the central bank is more willing to cut interest rates as housing slows economic growth.

``It's a little surprising,'' said Don Alexander, director of fixed income in New York at Citigroup Global Wealth Management, which oversees about $1.3 trillion in assets. ``We'll see a little bit of a rally.''

The yield on the two-year note decreased 9 basis points, or 0.09 percentage point, to 4.53 percent at 4:35 p.m. in New York, according to bond broker Cantor Fitzgerald LP. The price of the 4 3/4 percent security maturing in February 2009 rose 1/8, or $1.25 per $1,000 face amount, to 100 13/32.

Benchmark 10-year note yields fell 2 basis points to 4.54 percent, after falling to as low as 4.51 percent.

``Future policy adjustments will depend on the evolution of the outlook for both inflation and economic growth,'' the Federal Open Market Committee said in its statement after meeting today in Washington. The January statement referred to the possibility of ``additional firming.''

While inflation is ``elevated'' and the ``predominant'' concern, the statement dropped a reference to ``additional firming,'' language used since June, the last time the Fed lifted rates.

http://www.bloomberg.com/apps/news?pid=20601087&sid=aRb7lf_apRM8&refer=home

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March 22 (Bloomberg) -- U.S. Treasuries fell, with yields on 30-year bonds touching the highest level in almost a month, on speculation the Federal Reserve may cut interest rates while inflation is a risk.

The central bank yesterday unexpectedly softened a reference to the need for higher borrowing costs. Traders added to wagers inflation may accelerate and erode the value of longer-term debt.

``Selling pressure on the long end is pressuring all maturities,'' said Brian Varga, co-head of Treasury trading in Calabasas, California, at Countrywide Securities Corp., one of the 21 primary government securities dealers that trade with the Fed. ``The Fed is rolling the dice that diminishing growth rates will naturally pull inflation into the target zone.''

The yield on the 30-year bond, the longest debt and most sensitive to inflation expectations, rose 6 basis points, or 0.06 percentage point, to 4.78 percent at 2:54 p.m. in New York, according to bond broker Cantor Fitzgerald LP. The price of the 4 3/4 percent security maturing in February 2037 declined 31/32, or $9.69 per $1,000 face amount, to 99 17/32. Bond yields move inversely to prices.

Two-year note yields gained 5 basis points to 4.58 percent, 20 basis points less than 30-year yields and the widest since May. The average gap over the last 10 years has been 142 basis points.

Shorter-term debt declined less because ``people are buying two-year notes and selling 30-year bonds and 10-year notes,'' said T.J. Marta, a fixed-income strategist in New York at RBC Capital Markets, the investment-banking arm of Canada's biggest lender.

http://www.bloomberg.com/apps/news?pid=20601009&sid=a_aJf1hi8.X8&refer=bond

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March 26 (Bloomberg) -- The perceived risk of owning U.S. corporate bonds rose after a government report showed new-home sales unexpectedly fell, according to traders who bet on corporate creditworthiness in the credit-default swap market.

Contracts based on $10 million in debt in the CDX North America Crossover Index Series 8 rose $1,500 to $142,500 as of 4:50 p.m. in New York, according to Deutsche Bank AG. The index, which includes 35 U.S. and Canadian companies with both investment- and speculative-grade ratings and is used to bet on the ability of companies to repay their debt, closed at its widest level since a new version of it started trading March 20.

The report stoked concerns that the worst housing slump in more than a decade isn't over and may get worse as defaults and delinquencies among the nation's riskiest borrowers continue to climb. Subprime mortgage borrowers, typically people with limited or poor credit histories, last quarter fell behind on their loan payments at the highest rate in four years.

``Credit investors are nervous and jumpy right now regarding anything related to housing or the subprime market,'' said Mike Mutti, New York-based co-head of corporate credit strategy at Bear Stearns Cos., the biggest U.S. underwriter of mortgage bonds.

http://www.bloomberg.com/apps/news?pid=20601009&sid=aAzdRjHgRbMQ&refer=bond

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NEW YORK, April 2 (Reuters) - Hedge funds and non-bank investors provided three-quarters of high-yield loans to U.S. companies at the end of 2006, up from one-third in 1997, according to Standard & Poor's Leveraged Commentary & Data.

Non-bank investors "have gone from supporting players to leading actors in the leveraged loan market," analysts Steven Miller and Robert Polenberg co-wrote in the April 2007 report.

The volume of collateralized loan obligations, or CLOs, almost doubled last year to a record $97 billion from $53 billion in 2005, according to data from JP Morgan Chase & Co. and Merrill Lynch & Co.

S&P LCD expects loans to continue to increase as private equity firms continue to rely on high-yield loans to fund buyouts.

Loans "appear likely to climb to near parity with high-yield bonds in terms of outstanding debt by the end of 2007," the S&P LCD report said. By 2009, high-yield loan issuance may surpass high-yield bonds, the report said.

S&P also said that returns for loans averaged 5.46 percent from 1997 to 2006, ranging from a high of almost 10 percent in 2003 to a low of 1.9 percent in 2002.

"B" rated loans have outperformed "BB" rated loans for the past five years, posting returns of about 7 percent versus 4.9 percent.
http://today.reuters.com/news/articleinvesting.aspx?type=fundsFundsNews&storyID=2007-04-02T163600Z_01_N02431355_RTRIDST_0_USA-LOAN-SANDP-UPDATE-1.XML

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April 6 (Bloomberg) -- Treasuries fell, pushing 10-year note yields to the highest in eight weeks, as a more-than-forecast increase in hiring and a drop in the unemployment rate in March eased speculation the Federal Reserve will cut borrowing costs.

Two-year notes, more sensitive than longer-maturity debt to rate changes by the Fed, fell the most since March 9, when the previous monthly employment report also was stronger than economists forecast. In interest-rate futures markets, the odds of a rate cut by mid-year fell almost to zero.

``It makes it very difficult to make the case the Fed may cut anytime soon, and the market is taking out those cuts that it had priced in,'' said Michael Pond, an interest-rate strategist in New York at Barclays Capital Inc., one of the 21 primary dealers that trades directly with the central bank.

The yield on the benchmark 10-year note rose 7 basis points, or 0.07 percentage point, to 4.75 percent at 11:26 a.m. in New York, according to bond broker Cantor Fitzgerald LP. The price of the 4 5/8 percent security due February 2017 fell 18/32, or $5.63 per $1,000 face amount, to 99.

Yields on two-year notes rose 11 basis points to 4.74 percent, the highest since Feb. 26. The price of the 4 1/2 percent security fell 7/32 to 99 18/32.

The difference between yields on two-year and 10-years Treasuries narrowed to about 1 basis point from 5 basis points yesterday, the smallest in two weeks. The narrowing gap indicates investors expectations are increasing that ``the Fed will respond to higher inflationary pressures,'' Pond said.
http://www.bloomberg.com/apps/news?pid=20601103&refer=us&sid=ayGvV0U1uDuI

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April 9 (Bloomberg) -- Rising oil prices, Mideast conflicts and a U.S. president perceived as ineffective contributed to the stagflation of the 1970s. Today, in the bond market, where Yogi Berra's immortal lines are increasingly invoked, ``it's deja vu all over again.''

Nowhere is that more evident than with Treasury inflation- protected securities. The difference in yields between 10-year TIPS and conventional notes has widened to 2.5 percentage points, a seven-month high and up from 1.43 percentage points in 2002. The gap suggests so-called real returns on the fixed-rate notes will be eroded by $2.5 million annually on $100 million of securities.

``We have a measure of stagflation,'' said Paul Samuelson, who was the second recipient of the Nobel Prize in economics and helped popularize the term to describe slowing growth and accelerating inflation in the U.S. during the 1970s.

Investor confidence in the Federal Reserve's ability to restrain inflation, as measured by TIPS, peaked in October 1998, when the difference between the inflation-linked notes and 10- year Treasuries narrowed to a record low 0.647 percentage point.

The change in sentiment is reflected in investor returns. Inflation-linked notes due in 10 years and longer gained 1.85 percent this year, compared with 1.1 percent for Treasuries with similar maturities, according to Merrill Lynch & Co. data.

Politicians and Fed officials alike dread the bond market's response to changes in fiscal and monetary policy. Former President Bill Clinton found early in his administration that proposals were stymied by concern how bond investors would react, said James Carville, a Clinton consultant during the 1992 presidential campaign.

http://www.bloomberg.com/apps/news?pid=20601103&refer=us&sid=aKGp4kEjHa9E

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April 11 (Bloomberg) -- When Buck Meyer thinks about the $300,000 he lost after he bought a subprime mortgage lender's bonds, he doesn't hesitate to denounce financial titans Bear Stearns Cos., Credit Suisse Group, JPMorgan Chase & Co. and Morgan Stanley.

Like the thousands of people who snapped up American Business Financial Services Inc.'s notes yielding 10 times the going rate on Treasury bills, Meyer had no idea that the company was on the verge of bankruptcy. He wondered how something so celebrated as ``a kitchen-table startup'' by the Philadelphia Business Journal and so lucrative that it paid $50 million in fees to the four firms for its burgeoning credit, could default on his money.

``At what point did it become a Wall Street Ponzi scheme?'' said the 52-year-old Meyer, who almost wiped out the nest egg he received from selling his home in Doylestown, Pennsylvania, six years ago.

Whether Wall Street's best and brightest were reckless in their pursuit of profits and somehow responsible for the consequences will be decided in a Philadelphia court. That's where the four top brands of finance are accused of creating an ``illusion'' that American Business was a safe investment, according to a lawsuit filed on behalf of Meyer and more than 20,000 other individuals who held about $600 million of the company's bonds when it went bankrupt in 2005.

``The market needs to do a better job of policing than it has to date,'' said David Hendler, head of the group that analyzes the debt of financial services companies at CreditSights Inc. in New York.

http://www.bloomberg.com/apps/news?pid=20601009&sid=avI34G5JBAjQ&refer=bond

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April 16 (Bloomberg) -- SLM Corp., the U.S. student-loan provider known as Sallie Mae, accepted a $25 billion takeover bid from JPMorgan Chase & Co., Bank of America Corp. and two private-equity funds.

JC Flowers & Co., Friedman Fleischer & Lowe LLC and the banks offered $60 a share for Reston, Virginia-based Sallie Mae, or 28 percent more than the April 13 closing price of $46.76. The funds plan to take 50.2 percent of the company and JPMorgan and Bank of America will each own 24.9 percent, the companies said in a statement today.

Demand for student loans has surged an average 27 percent each of the last six years as more students borrow to attend universities such as Harvard, Princeton and Yale. The agreement comes just days after SLM said it would pay $2 million and adopt a new code of conduct in a settlement with New York Attorney General Andrew Cuomo, who is probing deceptive loan practices among lenders and college financial aid officers.

``There's a lot of potential value, and there's scope for consolidation as well'' in the student-loan industry, said Lucy MacDonald, chief investment officer at RCM Ltd. in London, which oversees $100 billion and doesn't own any SLM shares. ``It should be a relatively good, moderate growth business.''

Students at U.S. colleges borrow an estimated $85 billion year to finance school costs, and the loans are considered safe because of government guarantees.

http://www.bloomberg.com/apps/news?pid=20601087&sid=axr4Ag08VaT4&refer=home

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April 23 (Bloomberg) -- The biggest bull market in U.S. Treasury bonds is over, according to the analysts who rely on historical price patterns to make their assumptions.

The proof that it now pays to be bearish can be found in financial futures based on the government's 4 3/4 percent bond maturing in 2037, a benchmark for the 22-year, 11-month rally that began in May 1984 and ended on April 6, says John Kosar, president of Asbury Research in Lake in the Hills, Illinois. That's when the price of 30-year Treasury bonds for delivery on the Chicago Board of Trade fell below 110 20/32 and signaled a new direction for the market, he said.

The turning point was so obvious that even ``a five-year- old who has a ruler and a pencil can draw a line under the lows and make a determination'' that bond yields have bottomed and are poised to climb for many years to come.

While former traders like Kosar don't get much respect in academic circles, they insist their charts confirm what some investors already know: ``that inflation is the issue,'' he said.

The Federal Reserve's preferred measure of inflation, the price index for personal consumption expenditures excluding food and energy, has been 2 percent or higher since April 2004. In the previous eight years, it topped that level during only six months. Core inflation was as high as 4.7 percent in 1984 when 30-year bond yields rose to 13.9 percent.

http://www.bloomberg.com/apps/news?pid=20601109&refer=exclusive&sid=aUOfQwjDOoi8

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April 24 (Bloomberg) -- Bond investors who financed the U.S. housing boom are starting to pay the price for slumping home values and record delinquencies in subprime loans.

They will lose as much as $75 billion on securities made up of millions of mortgages to people with poor credit, says Pacific Investment Management Co., manager of the world's biggest bond fund. Some of the $450 billion in subprime mortgage-backed debt sold last year has lost 37 percent, according to Merrill Lynch & Co.

BlackRock Inc., AllianceBernstein Holding LP and Franklin Templeton Investments are vulnerable because investors have replaced banks and thrifts as the primary source of money for U.S. mortgages. More than $6 trillion of mortgage bonds are outstanding, dwarfing the amount of U.S. government debt by about 50 percent.

``Bond investors will be the ones who will take the losses,'' not the banks, said Scott Simon, who oversees $250 billion in asset-backed securities at Newport Beach, California- based Pimco, a unit of insurer Allianz SE in Munich.

Investors are losing money because of places like Riverside County, California, where foreclosures almost tripled last quarter to 6,103 from a year earlier, the biggest increase in the U.S., according to Foreclosures.com.

Lehman Brothers Holdings Inc., the fourth-largest U.S. securities firm, used Riverside loans as collateral for $1.5 billion of bonds sold in January 2006. Some of the lowest-rated portions of the securities trade at 63 cents on the dollar, down from more than 100 cents in October, according to data compiled by Merrill Lynch.
http://www.bloomberg.com/apps/news?pid=20601109&sid=aCjo0BY2LlZw&refer=exclusive

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Avoid U.S. Credit Risk

11:46:00, May 10, 2007

The combination of decelerating profit growth, deteriorating corporate health and rising equity volatility augurs poorly for corporate bonds; stay underweight.

Our model of S&P 500 operating earnings currently predicts a sharp deceleration in profit growth over the next two quarters, before rebounding late in 2007. Ongoing weakness in corporate pricing power is the key driver behind the projected drop in profits, although firm energy prices and a flat yield curve are also partly to blame. Corporate bonds have been able to shake off the unprecedented acceleration in shareholder claims against cash flow so far, largely due to the strength in profit growth. They will not fare so well as profits sag, especially given that equity implied volatility has begun a cyclical uptrend. Along with an expected deterioration in ratings changes these factors will push investment grade corporate spreads significantly wider over the next six months (according to our U.S. Bond Strategy Service).

http://www.bcaresearch.com/public/index.asp

May 14 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke's inflation concerns have prompted investors to make a record bet against $88.8 billion of two-year Treasuries.

That's the amount of futures contracts on notes traders have sold at the Chicago Board of Trade, the most since the Commodity Futures and Trading Commission began keeping track of the data in 1993. It exceeds wagers to profit from rising prices by $51.8 billion, the largest so-called net short position ever, according to CFTC data released May 11.

Speculation on a decline in the short-term Treasury notes has more than doubled in the past two months as the economy weathers the worst housing slump in a decade and Fed officials signal they have no intention of cutting their target rate for overnight loans between banks anytime soon. Two-year notes are more sensitive to changes in interest rates than longer-term debt.

``The rate cuts that people have been expecting in earnest late last year and early this year have slowly been priced out,'' said Brian Carlin, head of fixed-income trading in New York at JPMorgan Private Bank, which oversees $100 billion. He has clients betting against two-year notes.

The growth shows how much sentiment has shifted among traders, who were convinced the housing slowdown would prompt the central bank to cut rates to 4.5 percent from 5.25 percent this year as recently as March. Options contracts based on the target rate now show traders are anticipating one quarter-point reduction.
http://www.bloomberg.com/apps/news?pid=20601009&sid=auZK5iV01WrA&refer=bond

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May 15 (Bloomberg) -- Never have so many made so much money from junk bonds, and that worries Dan Fuss.

Fuss, whose $10.7 billion Loomis Sayles Bond Fund has been the best performer among its peers the last 10 years, says high- yield, high-risk securities are showing unmistakable signs of a bubble. Yields are near record lows relative to government securities even though sales of the riskiest bonds increased 39 percent from last year, debt has grown faster than earnings and the economy is expanding at the slowest pace in five years.

``I haven't felt this nervous about a market ever,'' said Fuss, vice chairman of Loomis Sayles & Co. in Boston, who's been working in the banking and securities industries since he joined Wauwatosa State Bank in Wisconsin in 1958. His fund has returned an average 9.91 percent a year for the last decade, the best of 45 funds with similar investment rules, according to Lipper, the mutual fund research firm.

Martin Fridson, head of high-yield research firm FridsonVision LLC, and Mariarosa Verde, managing director of credit market research at Fitch Ratings, say sales of junk bonds and the record $366 billion of leveraged buyouts may lead to the worst bear market for bondholders.

The last time junk bonds tumbled was in 2002, when companies defaulted on $166 billion of their securities, according to Moody's Investors Service. Merrill Lynch & Co.'s High Yield Master II Index fell about 2 percent that year as yields on the securities rose to a record 11.2 percentage points over Treasuries. Speculative grade, or junk, bonds are rated below Baa3 by Moody's and BBB- by Standard & Poor's.

http://www.bloomberg.com/apps/news?pid=20601109&refer=exclusive&sid=awc.wd3rXy.c

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May 18 (Bloomberg) -- When California sells taxable bonds to foreigners, Moody's Investors Service says the state's credit is Aaa, the highest possible. When the state sells tax-free debt to U.S. citizens, its creditworthiness is four levels lower.

The discrepancy may cost taxpayers as much as $3.6 billion in extra interest on bonds sold during 2006, said Matt Fabian, an analyst at Municipal Market Advisors, a research firm in Concord, Massachusetts. New York-based Moody's doesn't allow towns and cities to apply the higher rankings to tax-exempt financings that make up 90 percent of the $2.4 trillion in outstanding municipal bonds.

``There has been a double standard for a long time,'' said Tom Dresslar, a spokesman for California Treasurer Bill Lockyer, who oversees finances for the biggest government borrower in the U.S. after the Treasury. ``To the extent that the ratings increase debt service cost and are not truly a reflection of the risk, taxpayers come out on the short end of the stick.''

Moody's has been the arbiter of financing costs for companies and governments since it slapped a letter grade on the creditworthiness of railroad bonds in 1909. Its distinction between municipal bonds and other debt penalizes local governments and taxpayers, even though Moody's data show a corporation is about 97 times more likely than a municipality to default over a 10-year period.
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By Mark Pittman

May 22 (Bloomberg) -- Finance company bonds, the fastest- growing part of the corporate debt market, are no longer a haven from leveraged buyouts.

Bondholders were ambushed by last month's $25 billion takeover of SLM Corp., the student loan company known as Sallie Mae. They had assumed that companies whose profits depend on investment-grade credit ratings couldn't afford to pile on debt.

``The LBO risk factor is dramatically underpriced,'' said Greg Habeeb, a senior vice president at Calvert Asset Management Co. in Bethesda, Maryland, who manages $8 billion of bonds. ``We're not rushing to buy anything.''

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May 26 (Bloomberg) -- Treasuries fell, pushing yields on benchmark 10-year notes to the highest level since January, on a sign of housing strength and comments from Federal Reserve policy makers that inflation remains their primary concern.

Futures traders pared bets this week that the central bank will lower interest rates after a government report showed the biggest rise in new-home sales in 14 years. Richmond Fed President Jeffrey Lacker said investors may be underestimating the central bank's resolve to lower inflation.

``The risk of another soft quarter seems to be pulling back a little bit, and that's what Treasuries are responding to,'' said Ian Lyngen, an interest-rate strategist in Greenwich, Connecticut, at RBS Greenwich Capital, one of the 21 primary security dealers that trade with the Fed.

The yield of the benchmark 10-year note rose this week by 6 basis points, or 0.06 percentage point, to 4.86 percent, according to bond broker Cantor Fitzgerald LP. It touched 4.9 percent on May 24, the highest since Jan. 31. The price of the 4 1/2 percent security due in May 2017 fell 15/32, or $4.69 per $1,000 face amount, to 97 6/32. The yield of the 30-year bond rose to 5 percent, near the highest since Aug. 16.

Sales of new homes rose 16 percent last month, the Commerce Department said May 24. New-home sales touched an almost seven-year low in February. The department said in a separate report for April that goods meant to last several years posted their longest streak of monthly gains in almost two years.

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http://agonist.org/20070530/looming_crash_prompts_jump_in_distressed_debt_hiring

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June 4 (Bloomberg) -- Emerging-market bonds were little changed, pushing yield spreads wider, as a tumble in Chinese stocks eroded demand for emerging-market securities.

China's benchmark index plunged 7.7 percent, pushing it down 16 percent from a May 29 peak and erasing more than $350 billion of market value.

``We've had the sell-off in China this morning and that's gotten people thinking about their positions,'' said Nick Chamie, head of emerging markets at RBC Capital Markets in Toronto.

Risk premiums, or the extra yield bondholders demand to own emerging market debt over U.S. Treasuries, climbed from a record low, according to JPMorgan Chase & Co.'s EMBI Plus index. The average yield, or spread, widened 2 basis points, or 0.02 percentage point, to 1.51 percentage points at 10:19 a.m. New York time.
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June 4 (Bloomberg) -- Citadel Investment Group's purchase of Resmae Mortgage Corp. is the latest evidence that investors' appetite for new bonds backed by subprime mortgages is returning five months after the industry crashed.

The $180 million acquisition by Citadel, a $14 billion hedge fund, shows that the market for loans to people with weak, or subprime, credit isn't dead, said Sharon Greenberg, vice president of asset-backed securities research for Credit Suisse Group in New York.

``The fact is that somebody came in and saw value,'' Greenberg said. ``It is definitely a good sign.''

ResMae is one of six subprime mortgage lenders that went bankrupt after investment banks began pulling support for the $600 billion industry amid rising default rates in late 2005. Hedge funds and investment banks have since snapped up subprime loans, which are riskier than the so-called prime mortgages that carry lower interest rates, for as little as 34 cents on the dollar.

Today, Accredited Home Lenders Holding Co. announced it is being bought by Dallas-based private equity firm Lone Star Funds for $400 million in cash, or about 40 percent of what the company was worth at the end of last June, according to Bloomberg data. Last year Accredited disbursed $15.8 billion in loans, making it the 13th biggest subprime lender in the U.S., according to Inside Mortgage Finance.
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June 8 (Bloomberg) -- U.S. Treasury 10-year notes are poised for their biggest weekly decline in more than two years, even after recovering from early losses today, on concern that faster economic growth will lead central banks to raise interest rates.

Ten-year notes, whose yields determine interest rates on mortgages and corporate bonds, had their biggest slump in more than three years yesterday. The yield touched 5.25 percent earlier today, the highest since May 2002.

``We are clearly getting more attractive interest rates,'' said Andrew Harding, who manages $16 billion in fixed income as chief investment officer at Allegiant Asset Management in Cleveland. ``We're getting to a point that's closer to an acceptable real rate of return.''

The yield on the 4 1/2 percent security due in May 2017 increased 20 basis points this week, or 0.20 percentage point, to 5.15 percent at 11:38 a.m. in New York, according to bond broker Cantor Fitzgerald LP. The price, which was little changed today, fell 1 1/2, or $15 per $1,000 face amount, to 94 31/32 this week. Earlier today the 10-year note fell as much as 26/32.

The gain in the yield this week was the biggest since an increase of 24 basis points during the period ended March 11, 2005.

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June 11 (Bloomberg) -- U.S. Treasuries fell, extending five weeks of losses, as Federal Reserve Bank of Cleveland President Sandra Pianalto said inflation is ``uncomfortably high.''

Fourteen of the 21 primary dealers that underwrite the government's debt boosted their year-end estimate for the central bank's target rate or the 10-year note's yield. This week the government will release reports on consumer and wholesale prices. Yields on 10-year notes exceed two-year securities by 14 basis points, the most since May 2006.

``A lot of people are throwing in the towel and the curve needs to steepen,'' said Richard Schlanger, who manages about $4 billion of fixed-income assets, including Treasuries, at Pioneer Asset Management in Boston.

The yield on the benchmark 10-year note rose 3 basis points, or 0.03 percentage point, to 5.14 percent at 11:34 a.m. in New York, according to bond broker Cantor Fitzgerald LP. The price of the 4 1/2 percent note due May 2017 fell 1/4, or $2.50 per $1,000 face amount, to 95 3/32. Yields move inversely to prices.

The two-year note yield was unchanged at 5 percent. Two-year note yields have been lower than 10-year Treasuries for four days as investors demand higher returns on long-term debt to compensate for the risk alternative investments will provide greater returns over time.
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June 12 (Bloomberg) -- Yields on 10-year Treasury notes climbed to the highest in five years as former Federal Reserve Chairman Alan Greenspan predicted an increase in benchmark yields and greater premiums on emerging-market debt.

``The moment he made that comment the market fell apart,'' said Irene Tse, co-head of U.S. interest-rates trading at Goldman, Sachs & Co. in New York.
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