US borrowing costs drop

Corporate borrowing costs have fallen for the first time in almost two weeks amid US government plans to stem the collapse of confidence in the financial markets.

Morgan Stanley led a rally in bonds yesterday that included General Electric Co and Charter Communications. The gains were sparked by optimism that Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben S Bernanke’s proposal to remove troubled assets from banks is re-opening debt markets.

The rally capped a week when no investment-grade corporate bonds were sold in the US for the first time since 1999 as investors fled all but the safest government debt. That flight pushed yields on investment-grade corporate bonds to a record 4.4 percentage points more than Treasuries on average on September 18, said Merrill Lynch & Co. The spread narrowed to 4.15 percentage points yesterday, its first drop since September 8.

“This could be a very strong catalyst for companies to get access again,’’ said Mark Kiesel, the executive vice-president at Pacific Investment Management Co, the manager of the world’s biggest bond fund. “The problem that we were in was no one wanted to lend to anyone. The corporate capital markets were freezing up.’’ Kiesel oversees $180 billion in corporate debt from his Newport Beach, California, office.

The proposal would mark the biggest expansion of federal power over the financial system since the Great Depression. It includes a plan to support money-market funds and is aimed at removing the devalued mortgage-linked assets at the root of the credit crisis.

Congressional leaders, who met with Paulson and Bernanke this week in Washington, said they aim to pass a legislation soon.

Concern over the health of financial companies has been weighing down the whole market, said Andrew Harding, the chief investment officer for fixed income at Allegiant Asset Management in Cleveland. He controls $20 billion in fixed-income assets.

“That’s where the illness has been, and that medicine has been used there to sustain them,’’ he said. The weakness in financial company debt had spread to all borrowers, he said.

Corporate bond sales this month are running at less than half the pace that analysts anticipated. About $19.3 billion of investment-grade securities have been issued this month, down from $55.7 billion in the same period in 2007, according to Bloomberg data.

Morgan Stanley

The dearth of buyers prompted officials at biotechnology developer Amgen and phone carrier Qwest Communications International to say this week that they may use cash to pay off debt as it comes due instead of rolling it over because borrowing was so expensive.

Qwest Chief Financial Officer Joseph Euteneuer said the government’s announcement has made selling debt more attractive than earlier this week.

“The capital markets loosened up,’’ he said in a telephone interview yesterday. “Interest rates got better.’’

Financial institutions such as Morgan Stanley, the second-largest independent securities firm in the US, led yesterday’s rally in company debt. New York-based Morgan Stanley shares tumbled the most in its history on September 17 amid concern its funding sources are drying up.

Complete reversal

Morgan Stanley’s $4.5 billion of 6.625 per cent notes due in 2018 soared 12 cents to 84 cents on the dollar yesterday, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. The yield on the 2018 notes shrank to 9.2 per cent, or 540 basis points more than Treasuries, from 11.5 per cent and a spread of 801 basis points two days ago. A basis point is 0.01 percentage point.

JPMorgan Chase & Co’s $6 billion of 7.9 per cent perpetual securities jumped 7.4 cents to 87 cents, according to Trace.

“There’s a complete reversal of the last couple of months,’’ Kiesel said.

A benchmark gauge of credit risk in North America plunged to the lowest since September 12, before Lehman filed for bankruptcy. Contracts on the Markit CDX North America Investment Grade Index, linked to the bonds of 125 companies in the US and Canada, dropped 30 basis points to 150 basis points, according to London-based CMA Datavision.

A basis point on a credit-default swap contract protecting $10 million of debt from default for five years is equivalent to $1,000 a year.

Some of the lowest-rated borrowers also gained. St Louis-based Charter’s $3.5 billion of 11 per cent notes maturing in 2015, rated Caa3 by Moody’s Investors Service and CCC by Standard & Poor’s, rose 3.3 cents to 72.6 cents. The bonds yield 18 per cent, down from 19.4 per cent two days ago.

Freescale gains

Charter wouldn’t comment on whether it would seek to sell new bonds now. Charter, the cable-television provider controlled by Paul Allen, is funded through 2009, with its next major maturity coming due in the fall of 2010, said Marty Richmond, director of investor relations.

“When opportunities present themselves, we’ve demonstrated an ability to take advantage of those windows very quickly,’’ Richmond said. “When markets change, that doesn’t necessarily have an effect on our strategy.’’

Austin, Texas-based Freescale Semiconductor’s $2.3 billion of 8.875 per cent debt due in 2014, which is rated B2 by Moody’s and B- by S&P, climbed 2.9 cents to 77.6 cents. The bonds yield 14.4 per cent, down from 15.3 per cent two days ago.

“Things are up across the board just because there’s a rebuilding of confidence in the financial system,’’ Allegiant’s Harding said. “That’s made the world a better place. It’s still too early to tell, but the market-making is exceptionally better than it was the last few days.’’