By Nancy Leinfuss
NEW YORK, March 18 (Reuters) - U.S. corporate bonds ended Tuesday's session on a stronger note as market players banked on a quick United States victory over Iraq, and as Federal Reserve policymakers kept interest rates unchanged, traders said.
"Overall, the tone has been pretty solid and we've seen some paper move," said one trader. "The market is relieved that we're going to war, that we have a plan and can eventually get back to dwelling on the fundamentals of the economy," he said.
Yield spreads between corporate bonds and Treasuries tightened by about 0.02 to 0.03 percentage point across the board, traders said. Spreads on recently beaten up auto sector issues improved by more, they said.
The Federal Open Market Committee voted on Tuesday to keep interest rates steady but signaled it was ready to cut them quickly if an Iraqi war takes an economic toll by saying it would practice "heightened surveillance."
"The Fed has eased very aggressively so far and we don't think that easing another 25 or 50 basis points right now is going to give the economy the boosts its looking for," said Ben Matthews, portfolio manager at John Hancock Advisors Inc., in Boston. "Right now the market is suffering through a wait and worry stage," he said.
U.N. weapons inspectors pulled out of Iraq on Tuesday and U.S. forces prepared to invade after President George W. Bush, in an address on Monday, gave Saddam Hussein 48 hours to leave the country.
While the Fed's decision to leave interest rates unchanged was highly anticipated by the market its failure to state clearly its so-called balance of risks assessment on the economy, left some baffled.
"I'm frankly stunned that the Fed didn't really make the case for the market at all. It refrained from assessing the direction for the economy - I thought that was their job," said one trader.
In other markets, U.S. Treasuries prices fell after the Fed kept interest rates steady but threw the market by saying it could not characterize the risks to the economy. Benchmark 10-year Treasury notes slid 17/32, driving its yield up to 3.906 percent.
The Dow Jones Industrial average closed with a 52.31 point gain on Tuesday, at 8194.23, following a 282 point rise in Monday's session, as Wall Street continued to bet on a swift and decisive U.S.-led military strike on Iraq.
CALENDAR OF SALES
In the primary market several issuers opted to bring debt sales to market opting to capitalize on what may be a small window of opportunity before a U.S. war with Iraq kicks into high gear.
"If you have any new-issue business to do, it's in your interest to get it done as soon as possible. We're entering into a lull, in terms of people focusing on the war," said Mitchell Stapley, chief fixed income officer at Fifth Third Investment Advisors Inc., Grand Rapids, Michigan.
Diageo Capital Plc, a unit of British drinks group Diageo Plc , the British drinks firm, sold $1 billion in five-year global notes on Tuesday, at a yield spread of 0.65 percentage point over Treasuries.
Another firm, Wells Fargo & Co. sold $1.1 billion of five-year global notes to yield 0.63 percentage point over Treasuries.
U.S. companies have sold $23 billion of investment grade issues so far this month, according to Reuters data, and about $145 billion year-to-date, according to Bank of America Securities.
"The greatest risk of the war to the issuance schedule is to disrupt it through some type of unexpected shock -- such as a reprisal terrorist attack," said Louise Purtle, analyst at CreditSights Inc. in New York. "Failing that, I think the fact that we are through the the warplay and into the actual war will alleviate uncertainty about what conditions a war would be fought under."
"If it appears to proceed quickly in terms of meeting the stated aims, then I would expect volumes to taper off as the need to pre-fund would be removed," said Purtle.
To see recent or upcoming corporate bond sales, click on [nNEUBD4].