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US Corp Bonds - Autos drive narrowing

By Nancy Leinfuss

NEW YORK, Oct 28 (Reuters) - U.S. corporate bond yield spreads ended at tighter levels across the board on Tuesday, with the auto sector driving the bulk of the gains, traders said.

Spreads, the additional yield corporate bonds pay over U.S. Treasuries, wrapped up the session about 0.02 to 0.03 percentage point tighter. Bonds of automakers narrowed 0.10 to 0.15 percentage point as sentiment improved for the sector, traders said.

Earlier, Standard & Poor's held a conference call to clarify its recent decision to place Ford Motor's credit rating under review for a possible downgrade. Ford's warning last week, coupled with a downgrade to DaimlerChrysler's rating, triggered bonds in that sector to sell-off by nearly a full percentage point, traders said.

Last week, S&P analyst Scott Sprinzen said he was considering lowering Ford's corporate bond rating to "BBB-" -- only one step higher than junk, or below-investment-grade, status. The move came nearly a year after Sprinzen had lowered Ford's rating to "BBB" and set out several targets for Ford to meet in 2003, including break-even results in its automotive business.

In a conference call on Tuesday, Sprinzen said Ford's continuing losses in its European unit and its reliance on cost-cutting to boost profits this year meant the rating could still be cut, even though Ford's automotive operations will likely break even and the company has raised its earnings estimate for 2003.

"The idea was that (break-even automotive) was necessary to maintain the rating, but not necessary and sufficient," Sprinzen said. "The idea was that '03 was a stepping stone to something much better, and we needed to see the trajectory of further improvement to feel the triple-B was warranted."

Some investors on the conference call accused the rating agency of "moving the goalposts" on Ford, saying the world's second-largest automaker had met the targets laid out last year and had shown it could improve its results in a tough environment.

Sprinzen said no decision had been made, but the agency would announce its decision by Nov. 18.

Spreads on Ford's 7 percent notes due in 2013 were quoted late in the session about 0.16 percentage point tighter on Tuesday, to trade at 2.97 percentage point more than Treasuries, according to MarketAxess.

"The auto sector opened stronger in anticipation of the conference call. There was an expectation in the market that S&P was going to be more definitive with regard to how they felt about Ford, but the outcome was that they were going to take their time making a final decision," said one trader.

Bonds of other automakers, like General Motors Corp. , which was affirmed by S&P last week, also ended about 0.07 percentage point tighter on the day, traders said.

In the high-yield market, bonds of R.J. Reynolds Tobacco Holdings rose about 2 points after news that it was buying the tobacco business of British American Tobacco Plc .

S&P affirmed RJ Reynolds corporate credit and senior unsecured debt ratings following the announcement. RJR is rated 'BB-plus' with a negative outlook. The company had about $1.7 billion of total debt outstanding as of Sept. 30, 2003. To see other fixed-income market reports please double click on the symbol:

U.S. Credit Market Outlook.............[US/0]

U.S. Corporate Bonds....[USC/]

U.S. Agency debt........[AGN/]

U.S. Mortgage-backeds...[MTG/]

U.S. Asset-backeds......[ABS/]

U.S. Swap markets.......[SWP/]

U.S. Municipal bonds ...[MUNI/]

European corporate bonds...............[EUB/] (Additional reporting by Justin Hyde; 313-967-1901))