This month's decline, the biggest since a 7.4 percent drop in February 1980, will also cap the worst quarter since a loss of 6.8 percent in the three-month period ended in September 1981, according to Merrill Lynch & Co.'s U.S. Corporate Master index. Daimler AG, the maker of Mercedes-Benz cars, was the only company among the 50 biggest issuers in the index to rise this month.
``There's no safety, the only thing you know is that if you don't buy anymore, you can't get hurt anymore,'' said Gregory Habeeb, who manages $8.5 billion of bonds at Calvert Asset Management Co. in Bethesda, Maryland.
The credit-market seizure led the Federal Reserve to pump an additional $630 billion into the global financial system this week as Congress prepares a second attempt at passing a $700 billion plan to help the financial industry shed devalued assets. The government's measures may fail to prevent a recession given the credit contraction, said John Lonski, chief economist at Moody's Capital Markets Group, who forecasts the economy will shrink in the fourth quarter and in the first quarter of 2009.
``It's been terrible in the financial markets because capital just won't flow,'' said Milton Ezrati, senior economist and strategist at Lord Abbett & Co. in Jersey City, New Jersey. ``People are just unwilling to lend or take any risk anywhere near a potential problem.'' Lord Abbett manages more than $40 billion in fixed-income assets.
Proceeding Cautiously
The extra yield, or spread, investors demand to own investment-grade debt instead of similar-maturity Treasuries widened to a record 4.65 percentage points yesterday from 3.17 percentage points at the end of August, Merrill data show. Investment-grade corporate bond sales have amounted to $82 billion in the past three months, the slowest quarter in a decade, according to data compiled by Bloomberg.
``If you're a business executive and you see this swelling of corporate credit risk premiums, how can you not respond by proceeding more cautiously?'' Lonski of Moody's said in an interview from his New York office. ``The near-term prognosis for the economy is: Poor.''
Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben S. Bernanke proposed the $700 billion plan to restore access to credit for individuals and businesses. The measure would give the U.S. Treasury authority to buy bad loans, including mortgages, from financial institutions.
`Insecure and Suspicious'
The credit markets have been a ``disaster,'' said Lord Abbett's Ezrati. ``The words are: Insecure and suspicious.''
Ezrati said the government bailout, if passed, will improve the tone in the market and increase available credit.
Bond investors are reticent to buy after being burned by what were once some of the highest-rated institutions. New York- based investment bank Lehman, rated A2 by Moody's Investors Service and A by Standard & Poor's until its collapse, filed for the biggest bankruptcy ever on Sept. 15.
The next day, New York-based American International Group Inc., the biggest U.S. insurer and rated A2 by Moody's and A- by S&P, was forced to obtain an $85 billion loan from the government in exchange for an 80 percent stake. Lehman's bonds have lost 86 percent on average this month, and AIG is down 37 percent, Merrill index data show.
Washington Mutual, the 119-year-old Seattle-based thrift, became the biggest U.S. bank to fail on Sept. 25. Its bonds have tumbled as much as 99.8 percent this month. Washington Mutual was rated investment-grade by Moody's until Sept. 11 and by S&P until Sept. 15.
Refocusing
Morgan Stanley recommends investors buy bonds of companies that don't need access to the capital markets in the near-term and whose earnings have held up as the economy slows. MDC Holdings Inc., the Denver-based builder of Richmond America Homes, is attractive because it doesn't have any maturities until 2012; and Hess Corp., the fifth-biggest U.S. oil company, offers a safe haven because the New York-based company's profit is still increasing, according to Morgan Stanley.
``In periods when sentiment is this bearish and when price action gets so dislocated and sloppy, we have to push back on the negativity,'' Gregory Peters, head of credit strategy at Morgan Stanley, said in a Sept. 26 report. ``We recommend focusing on companies which do not need to rely on capital markets for their survival, and those that can deliver quality earnings in the midst of all the economic turmoil.''
Risk of Being Wrong
Bonds of financial institutions fared the worst this month as investors dumped the debt on concern more banks will fail and as their access to capital in the short-term markets evaporated. The spread between yields on commercial paper due in 30 days sold by financial borrowers and those for industrial companies has widened to as much as 1.45 percentage points, the most since the Federal Reserve began compiling the data in 1997.
``Things are probably cheap but who can take on this kind of risk?'' said Calvert's Habeeb. ``The risk for being wrong is so substantial that institutions that were solvent institutions just two to three years ago are failing, and the risk is just deemed too great. That's what's precipitating this lack of buying and thus this freefall of prices.''
Financial company bond yields have jumped to a record 6.97 percentage points more than Treasuries on average from 3.64 percentage points at the end of August, Merrill index data show.
``My goodness that's unheard of,'' Lonski said. ``In all likelihood financial institutions and banks will tighten lending standards even further. That will have the effect of practically guaranteeing some reduction in economic activity.''
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