By Jonathan Stempel
NEW YORK, Dec 24 (Reuters) - U.S. corporate bonds performed in line with Treasuries in very light pre-holiday trading on Tuesday, traders said.
Investors, analysts and syndicate officials expect meaningful primary and secondary market activity to resume by the first full week of January, though some have tempered their hopes for a "January effect" rally following corporate bonds' strong performance since early October.
"While risk aversion may be subsiding from its recent highs in October, clearly an above-average level of aversion to risk still persists," wrote Jessica Walker, an economist at Moody's Investors Service.
The average investment-grade corporate bond now yields 5.22 percent, or 1.86 percentage points more than similar-maturity U.S. Treasuries, while the average junk bond yields 12.12 percent, or 8.81 percentage points more than Treasuries, Merrill Lynch & Co. said.
Yield spreads peaked on Oct. 10 at a respective 2.67 percentage points and 10.97 percentage points more than Treasuries, Merrill Lynch said.
Still, Walker said junk bond spreads average about 1 percentage point more than they did before the WorldCom Inc. accounting scandal broke in late June.
"While a myriad of geopolitical uncertainties persist, each threatening to erupt at any moment, spreads seem unlikely to decline to levels last seen in the first half of this year," she said.
Treasury prices rose after the Commerce Department reported a surprising 1.4 percent drop in November orders for durable goods. Economists were expecting an increase. In late trading, 10-year Treasuries rose 1/32, as their yields fell to 3.927 percent. The U.S. bond market is scheduled to close at 2 p.m. (1900 GMT) for the Christmas holiday and reopen on Thursday.
QWEST CUT TO DEFAULT STATUS
Standard & Poor's on Tuesday cut Qwest Communications International Inc.'s corporate credit rating to "selective default" after the No. 4 U.S. local phone company agreed to cut its debt load by $1.9 billion by issuing new bonds with higher interest rates and greater security.
S&P also cut its senior unsecured debt rating for the company's Qwest Capital Funding Inc. unit to "D."
Qwest shares fell 5.1 percent, even though the Denver-based company late on Monday received its long-sought approval from the Federal Communications Commission to offer long-distance service in nine of 14 Midwestern and Western states, from Minnesota to Washington, that it serves.
"The company's business profile is improving, and the FCC decision is unquestionably a positive," said James Veneau, a vice president at Moody's Investors Service.
Still, he said Qwest, which has said it will restate about $1.5 billion of revenue and costs for sales of optical network capacity, faces accounting probes from the U.S. Securities and Exchange Commission and Department of Justice.
"These might not have big monetary impacts, but they may constitute a large, unquantifiable contingent liability in the form of potential lawsuits from shareholders or stakeholders," he said. "It's fair to say the number of suits will be large, and they may continue for some time."
To see recent debt sales or upcoming offerings, please click on [nNEUBD4].