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US Corp Bonds - Rally pauses, supply does not

By Jonathan Stempel

NEW YORK, Nov 19 (Reuters) - U.S. corporate bonds lagged Treasuries on Tuesday as heavy supply weighed on traders already looking to book profits after a three-session rally.

"There's a lot of supply in the market, which has rallied pretty dramatically," said one trader. "People are taking a little bit of a breather.

Spreads on investment-grade bonds shrank to 2.08 percentage points on Monday from 2.25 percentage points last Wednesday, and on junk bonds over that time to 9.5 percentage points from 9.9 percentage points, Merrill Lynch & Co. said. Investment-grade spreads widened about 0.02 percentage points on Tuesday morning.

Many professional analysts have urged investors to pare back on "safe" bonds, which have fared well most of the year, and troll in beaten-down, more volatile bonds. These have fared well recently -- most obviously, bonds from consumer finance company Household International Inc. , which higher-rated HSBC Holdings Plc offered to buy last week.

Companies on Monday sold more than $3.8 billion of investment-grade bonds, and at least $2 billion of sales are slated for Tuesday.

"Even previously out of favor credits such as J.P. Morgan and GMAC (General Motors' finance arm) have been welcomed back to the new issue market where they are finding a welcoming reception from investors as the high beta compression trade continues to drive spreads tighter," said CreditSights Inc., a New York fixed-income research service. Beta measures volatility.

J.P. Morgan Chase & Co. has faced concern over potential loan loss exposure and General Motors Corp. over potential pension liabilities.

Not all news in corporate bonds is good. Moody's Investors Service said on Monday that downgrades of U.S. companies' credit ratings have outpaced upgrades this quarter by about 6.7-to-1, compared with 4.5-to-1 in the third quarter.

"The corporate credit cycle's bottom still waits," said John Lonski, Moody's chief economist, in a report.

The Labor Department said on Tuesday that U.S. consumer prices rose 0.3 percent in October, and 0.2 percent excluding food and energy, both in line with economists' expectations. The Commerce Department said the U.S. trade deficit fell to $38.03 billion in September, but was the second highest ever.

In early trading, 10-year Treasuries rose 8/32, as their yields fell to 3.960 percent.

SALES

GMAC plans to sell $1 billion of notes, adding $500 million to its 6.125 percent notes maturing in August 2007 and $500 million to its 6.875 percent notes maturing in August 2012.

The 10-year notes now yield about 3.15 percentage points more than Treasuries, up from 2.9 percentage points before the sale appeared in the market on Monday, a trader said.

ASIF Global Financing plans to privately sell $500 million of five-year notes, and the Export-Import Bank of Korea, or Kexim, plans to sell $500 million of five-year notes yielding about 1.3 to 1.35 percentage points more than Treasuries.

In junk, Rexnord Corp., a power transmission components maker based in Milwaukee, plans to sell $225 million of 10-year subordinated notes.

After markets close on Tuesday, Advanced Micro Devices Inc. , the No. 2 computer chipmaker, plans to sell $300 million of five-year convertible senior notes with a 4.75 percent to 5.25 percent coupon and 23 percent to 27 percent premium, people familiar with the sale said.

To see other upcoming and recent sales, please click [nNEUBD4].