January 22, 2010

Top Stories: Bonds

Jan. 22 (Bloomberg) -- The following are the day's top stories
on bonds:

Corporate Spreads Widen, Boosting Yield for Morgan Stanley: Credit Markets
The rally in corporate bonds that drove U.S. borrowing
costs to two-year lows is sputtering after President Barack
Obama unveiled plans to rein in trading by banks and concerns
about the economy grew. The extra yield investors demand on
corporate bonds instead of Treasuries widened to 272 basis
points from the low this year of 266 basis points, or 2.66
percentage points, on Jan. 14, according to the Bank of America
Merrill Lynch U.S. Corporate & High Yield Master Index. The
last time spreads widened this fast was in November, when Dubai
said state-controlled companies would reschedule debt payments,
roiling world markets. Morgan Stanley boosted yields on a $4
billion bond sale yesterday as Obama's proposal to curb
risk-taking on Wall Street threatened to limit profits as U.S.
banks recover from $1.13 trillion in writedowns and credit
losses. Energy Transfer Equity LP canceled $1.75 billion of
notes, citing ``market conditions over the past several days''
after government reports showed an unexpected drop in jobs.
``There's some allocation out of risk-seeking assets into
risk-averting or risk-free assets,'' Chris Ahrens, head of
interest-rate strategy at UBS AG in Stamford, Connecticut, said
in an interview yesterday. ``Markets are obviously all reacting
to what Obama has to say.''

Kokusai, Pimco Shun U.S. Bonds After Forecasting Dollar Losses, Low Rates
Kokusai Global Sovereign Open, the world's second-largest
actively run bond fund, is betting against the dollar in 2010.
Bill Gross, who runs the biggest at Pacific Investment
Management Co., is scooping up debt in Germany and other
developed markets outside the U.S. They're shunning Treasuries
as the Federal Reserve's record low interest rates reduce
demand for the currency and make yields in other nations more
attractive. China, which cut Treasury holdings by the most in
five months in November, may pare purchases further on concern
the dollar will fall, said Liu Yuhui, an economist at a
government-backed research body. ``The U.S., Europe, U.K. and
Japan will all hold rates this year,'' said Masataka Horii, 43,
one of four investors for the $45.7 billion Kokusai fund in
Tokyo. ``The U.S. will keep its policy rate, even though the
market has priced in a rate hike. That will make the U.S.
dollar go lower.''

Vietnam Delays $1 Billion Debt Sale Pricing Until Next Week, Investors Say
Vietnam's government delayed the pricing of a $1 billion
sale of 10-year dollar bonds until early next week because of
volatility in global markets, three investors briefed by
bankers arranging the sale said. The fund managers, who asked
not to be identified, said they had been sent a message by
underwriters. Barclays Capital Plc, Citigroup Inc. and Deutsche
Bank AG are managing the sale. Citigroup spokesman James
Griffiths and Deutsche Bank spokesman Mark Bennewith declined
to comment. Timothy Cuffe, a Hong Kong spokesman at Barclays,
couldn't be contacted. The planned sale comes as
emerging-market bonds are headed for a weekly loss, during the
busiest start to a year for borrowing by developing nations
since 2005, on concern monetary tightening in China will cool
demand for high-yielding assets. Vietnam's central bank said on
Jan. 19 that the Finance Ministry would determine an
appropriate time for the issuance ``as long as the interest
rate for the 10-year bonds doesn't exceed 7 percent per year.''
``Recent issues by Poland and Indonesia have had to give some
concessions to make them more appealing to investors,'' Felix
Dornaus, an emerging-market bond manager in Vienna at Erste
Sparinvest KAG, which oversees 27 billion euros ($38 billion)
said before the delay.

Treasuries Head for Third Weekly Gain After Obama Bank Plan Lowers Stocks
Treasuries headed for a third weekly gain as speculation
that President Barack Obama's bank- regulation plans will crimp
economic growth weakened equities and added to demand for
fixed-income securities. The yield on the 10-year note reached
its lowest in a month amid speculation that China will seek to
cool its economic growth. Efforts by the Obama administration
to curb risk-taking at banks are ``great news for bonds,''
Societe Generale SA analysts said in a report today. ``The
Obama plan came out of the blue, hitting shares, and that's
been supportive for bonds,'' said Orlando Green, a fixed-
income strategist at Calyon, the investment-banking unit of
Credit Agricole SA. ``Earnings news has been patchy and
appetite for bonds has been elevated.'' The 10-year note yield
rose less than 1 basis point to 3.60 percent as of 6:30 a.m. in
New York, paring the weekly advance to 8 basis points,
according to BGCantor Market data. It earlier slid to 3.58
percent. The 3.375 percent security due in November 2019 fell
2/32, or 63 cents per $1,000 face amount, to 98 5/32. The Dow
Jones Stoxx 600 Index slid 0.8 percent, its third consecutive
decline.

Obama Bank Restrictions May Fail to Shield U.S. Financial System From Risk
President Barack Obama's proposal to impose limits on
commercial banks may win him support on Main Street and shake
up Wall Street without doing much to make the financial system
safer overall. The plan, which is still lacking in details and
must be approved by Congress, aims to make the banks more
secure by forcing them to minimize the trading they do on their
own account and give up their stakes in hedge funds and private
equity firms. ``It's the right direction,'' said Henry Kaufman,
president of Henry Kaufman & Co. in New York and a former vice
chairman of Salomon Inc. The danger is that such risky
activities could simply migrate to big non-bank financial
institutions, leaving the system as a whole no better off.
Banks also might try to make up for the loss of profits from
proprietary trading by lending more to risky borrowers such as
real estate developers, threatening the federal safety net,
said Martin Baily, a former White House economist now with the
Brookings Institution in Washington. ``Beware of unintended
consequences,'' said Robert Litan, vice president of research
and policy at the Kansas City-based Kauffman Foundation, a
group that promotes entrepreneurship, and a former Clinton
administration budget official. ``This could have perverse
effects on risk-taking.''

Medium-Grade Municipal Bond Yields Decline to Lowest Level in Three Months
Lower-rated state and local government bonds rose more than
top-rated benchmarks, pushing an index of yields on
medium-quality debt to a three-month low, as municipal issuers
raised more than $6 billion this week. The weekly Bond Buyer 25
index of 30-year securities backed by dedicated revenue sources
with an average A+ rating, Standard & Poor's fifth-highest,
slid 2 basis points, or 0.02 percentage point, to 4.91 percent,
the lowest since Oct. 22. The three largest fixed-rate
municipal deals this week, led by the county-owned airport
system that serves Las Vegas, included almost $2 billion in
bonds rated less than AAA, according to data compiled by
Bloomberg. ``Investors continue to find more value in the A and
AA categories, as the scarcity of AAA paper leads to
unfulfilled demand,'' Janney Montgomery Scott LLC fixed-income
strategists led by Alan Schankel and Guy LeBas said in a Jan.
21 note.

`Volcker Rule' Marks Vindication of Former Fed Chief's Push for Regulation
Paul Volcker didn't lose confidence when the Obama
administration initially cast aside his argument to separate
banking from trading in its plan for a new financial-regulatory
system. ``I'm sure he'll recognize the wisdom of my view sooner
or later,'' Volcker said an interview with Bloomberg Television
last April, referring to Lawrence Summers, President Barack
Obama's chief economic adviser. Volcker was vindicated
yesterday when Obama proposed limiting trading activities of
financial institutions to prevent another crisis, adopting
recommendations of the 82- year-old former Federal Reserve
chairman. Obama called it the ``Volcker Rule.'' ``This
represents somewhat of a shift from the positions of those in
the administration in favor of deregulation,'' said Joseph
Stiglitz, a Nobel laureate and frequent critic of the
administration. ``Volcker has been pushing for this for a year,
and it was one of my biggest disappointments that his idea
wasn't picked up by decision-makers until now.''

Bank Plan's Impact Rests on How U.S. Regulators Define Proprietary Trades
President Obama's plan to curb risk- taking by banks hinges
on how rigidly regulators define proprietary trading at firms
such as Goldman Sachs Group Inc. and JPMorgan Chase & Co.
Goldman Sachs, which generated at least 76 percent of 2009
revenue from trading and principal investments, gets the
``great majority'' of transactions from customers, according to
Chief Financial Officer David Viniar. About ``10-ish percent''
of the New York-based firm's revenue comes from ``walled-off
proprietary business that has nothing to do with clients,'' he
said on a conference call yesterday. The plan to curb
proprietary trading at banks is among proposals that Obama said
yesterday will strengthen the U.S. financial system and help
prevent a repeat of the credit crisis. Other restrictions would
prohibit banks from investing in hedge funds and private
companies and put new limits on banks' borrowings, according to
the White House. JPMorgan, Goldman Sachs, Citigroup Inc. and
Bank of America Corp. tumbled more than 4 percent in New York
trading, leading the S&P 500 Financials Index down 3 percent,
its biggest decline since October. All the banks are based in
New York except for Bank of America, which is in Charlotte,
North Carolina.

Greece Must Stick With Euro to Address Fiscal Problems, Provopoulos Says
Greece should remain in the euro region where its problems
``will be unequivocally easier to solve,'' rather than allowing
a new currency to devalue, pushing up inflation and interest
rates, the central bank governor said. A new currency would not
be like ``waving a magic wand,'' George Provopoulos said in an
article for the Financial Times. A weakened currency could
increase the cost of imports, stoking inflation, and boost the
cost of servicing public debt. Concern that Greece's government
will struggle to tame the European Union's biggest budget
deficit this week pushed the yield premium investors demand to
hold the nation's debt instead of German bunds to the highest
since the euro's debut in 1999. Finance Minister George
Papaconstantinou said yesterday that Greece won't need a rescue
package to reduce its debt. ``It will be immensely less costly
for Greece to eradicate its problems from within the euro
zone,'' Provopoulos wrote. ``Greece will not be tempted by
these short-term options, but will undertake the necessary,
bold adjustments.''

German Government Bonds Advance; 10-Year Bund Yields Least Since Dec. 21
German government bonds rose after U.S. President Barack
Obama's proposed bank regulations fueled a slide in global
equity markets, prompting increased demand for the perceived
safety of government debt. The gains drove the yield on the
10-year bund to 3.19 percent, the lowest since Dec. 21, while
the 2-year note yield dropped to the lowest since Sept. 8.
Obama proposed yesterday to limit the size of banks and
prohibit them from investing in hedge funds and private-equity
funds as a way to reduce risk- taking. ``Obama's comments have
sparked a `risk-off' mentality into most asset classes, which
is positive for bonds,'' said Charles Diebel, head of European
rate strategy at Nomura International Plc in London. ``There's
a lot of mystery and myth surrounding the plan. Uncertainty
makes investors cautious and weighs on equities, while bonds
are benefiting from flight-to-quality flows.'' The yield on the
bund, Europe's benchmark government security, fel1 3 basis
points to 3.19 percent as of 8:17 a.m. in London. The 3.25
percent security maturing January 2020 rose 0.13, or 1.30 euro
per 1,000-euro ($1,414) face amount, to 100.49. The two-year
note yield dropped 2 basis points to 1.10 percent.

Bank Default Swaps Jump on Obama Trading Curbs, China Inflation Concerns
The cost of insuring against losses on European bank bonds
rose on concern China will raise interest rates to cool
economic growth and trading curbs proposed by President Barack
Obama may dent the U.S. recovery. The Markit iTraxx Financial
Index of credit-default swaps on 25 European banks and insurers
jumped as much as 5.25 basis points to 89, the highest since
September. The index is up from a 20-month low of 63.25 basis
points Jan. 11. China's stronger-than-expected economic rebound
in the fourth quarter fueled speculation the central bank will
have to raise interest rates to keep inflation in check. U.S.
stocks tumbled, erasing 2010's gains, after President Barack
Obama proposed regulations limiting the kind of risk taking
that's blamed for causing the worst global recession in
decades. ``After the crises of 2008, banks needed to show
humility and restraint, and have failed to do so
spectacularly,'' said Gary Jenkins, London-based head of credit
strategy at Evolution Securities Ltd. ``Thus they are now in
danger of losing any control over the debate of what the
industry should look like and how it should be regulated.''

Gazprombank's Below-Market Mortgage Bond Swap Offer `Doesn't Make Sense'
OAO Gazprombank is proposing to convert 91.8 million euros
($129 million) of mortgage-backed securities at a below-market
exchange rate in a deal London- based brokerage Brains Inc.
says would mean losses for senior creditors. The lending unit
of Russia's biggest company and natural gas export monopoly is
seeking to convert the notes at 34.7 rubles per euro, said Igor
Rusanov, head of structured and syndicated finance at
Gazprombank in Moscow. The average rate in the past year has
been 44.1 rubles per euro, data compiled by Bloomberg show.
``It doesn't make sense for any senior euro note-holder to
approve such a proposal,'' said Shammi Malik, head of asset-
backed securities trading at Brains Inc. Malik has been in the
European securitization market for more than 20 years and was
previously head of asset-backed securities trading at Societe
Generale SA. ``Senior bondholders would be losing circa 20
percent of the principal of the notes under the proposed
redenomination and receive a substantially less liquid
security,'' he said. Brains traded some of the notes on behalf
of clients in November, said Malik.

Japanese Bonds Advance Most in One Week as Stronger Yen Sends Stocks Lower
Japan's 10-year bonds rose the most in a week as the yen's
gain to a one-month high versus the dollar damped the outlook
for exporter earnings, boosting demand for the safety of
government debt. Ten-year bond futures gained for the first
time in four days after U.S. President Barack Obama yesterday
proposed limiting risk-taking at banks to avoid a repetition of
the global financial crisis. Bonds also advanced as Japanese
stocks fell the most in two months with the Nikkei 225 Stock
Average erasing almost all of this year's advance. ``Obama's
remarks will continue to weigh on stocks until details of his
proposal become clear,'' said Daisuke Uno, chief strategist in
Tokyo at Sumitomo Mitsui Banking Corp., a unit of Japan's
third-largest banking group. ``External factors are positive
for Japan's bonds.'' The yield on the 1.3 percent bond maturing
in December 2019 declined 1.5 basis points to 1.325 percent as
of 4:05 p.m. in Tokyo at Japan Bond Trading Co., the nation's
largest interdealer debt broker. That was the biggest drop in
yield since Jan. 15. The price rose 0.131 yen to 99.781 yen.
The yield was up half a basis point this week.

Japan's Five-Year Notes to Benefit as Banks Invest Excess Cash, RBS Says
Japanese banks will increase purchases of the nation's
government bonds as declining demand for loans leaves them with
excess cash to invest, according to RBS Securities Japan Ltd.
Five-year notes will benefit as surplus funds in the financial
system supplied by the Bank of Japan move into bonds, capping
any gain in yields, RuiXue Xu, a rates strategist in Tokyo at
RBS Securities, wrote in a report dated yesterday. Yields
dropped to their lowest level in two weeks after a report by
the central bank yesterday showed loans fell the most in more
than five years as companies cut spending. ``Money will likely
firstly flow into the short and intermediate sectors and then
expand to the longer end, as was the case in 2002-2003 JGB
bubble period,'' Xu wrote. Five-year bonds ``will likely be the
first sector on the curve'' to benefit ``most from such
buying,'' the report said. The yield on the five-year note due
December 2014 fell 2.5 basis points, or 0.025 percentage point,
to 0.495 percent as of the 11:05 a.m. morning close in Tokyo at
Japan Bond Trading Co., the nation's largest interdealer debt
broker. Two-year yields were unchanged at 0.155 percent.

For the complete stories summarized here, and for more of
the day's top news, see TOP <Go>.

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