By Nancy Leinfuss
NEW YORK, Sept 25 (Reuters) - U.S. corporate bonds opened stronger on Wednesday, as investors capitalized on recently beaten down issues to scoop up some bargains, traders said.
"We were expecting another horrendous day, but we saw a lot of buying from European markets so the tone has improved," said one trader. "People seem to be looking for the bottom."
Spreads to U.S. Treasuries were quoted 0.2 to 0.5 percentage point tighter on Wednesday after ending 0.10 to 0.30 percentage point wider on Tuesday, traders said.
Auto issues, which suffered the most in Tuesday's session, narrowed by 0.20 percentage points early Wednesday, they said.
Worries over the economy, the possibility of war with Iraq and growing concerns over sluggish corporate earnings have all weighed on the market.
Federal Reserve policymakers voted on Tuesday to keep interest rates unchanged but warned the economy was at risk of further weakness. The news drove stocks lower and pushed corporate spreads wider as the markets struggled to find a piece of good news.
David Novosel, managing director and head of fixed-income research at Banc One Capital Markets, in Chicago, said he sees more volatility over the near term.
"Over upcoming weeks we should see a mixed bag with some weeks mired by doom and gloom and others that show improvement, but overall we will see more volatility ahead," said Novosel.
Novosel said he sees safe-haven names, like those found in the consumer products and retailing sectors continuing to benefit from the volatility near-term. Other names, such as Sprint Corp. , Ford Motor and Household International , among those hit the hardest by the recent volatility, were expected to show signs of improvement by early next year, he said.
In the junk bond sector, prices were quoted firmer, rebounding from Tuesday's weakness. Issues traded up by an 1/8 to 1/4 point in light volume, traders said.
Brokerage firm Merrill Lynch & Co. said on Wednesday the average junk, or high-yield, bond yields 10.15 percentage points more than similar maturity U.S. Treasuries, or 13.43 percent.
The yield gap is higher than the recent 10.01 percentage point peak set on Aug. 14, and not far off the all-time 10.52 percentage point peak set on Jan. 3, 1991, Merrill Lynch said.
In other markets, U.S. Treasuries, which have benefited from all the uncertainty plaguing the markets for nearly six weeks, opened weaker on Wednesday as stocks turned higher.
In early trading, 10-year Treasuries fell 14/32, as their yields rose to 3.700 percent while the Dow Jones Industrial Average gained 90 points to 7773.
SALES
In the primary market, the Bank of Scotland is planning a $750 million global note sale of 12-year notes, for as early as Wednesday, dealers said.
German bank HVB Group plans to sell $500 million of notes, while Staples Inc., the office supply retailer, is also on tap to sell $325 million of 10-year notes, dealers said.
On Tuesday, issuers sold about $1.2 billion of investment-grade supply.
To see other recent and upcoming sales, please click here [nNEUBD4].
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