Bailout hopes so far limit Citigroup bonds' downside

By Dena Aubin - Analysis

NEW YORK (Reuters) - Citigroup (C.N) has serious troubles, but its bondholders appear confident the bank will either muddle through or receive more bailout funds from the government, limiting the damage for debt investors.

Stockholders are not nearly so sanguine.

The bank's shares plummeted 22 percent on Wednesday to their lowest levels since the bank won a government rescue in November as investors fretted about the bank's ability to generate a profit anytime soon.

But the company's bonds lost just 3 percent to 5 percent in value in the session, after earlier comments by Federal Reserve Chairman Ben Bernanke suggested further injections of capital are possible for struggling banks.

"What the market is saying is that the government is unlikely to leave debtholders holding the bag," said Henry Asher, president of Northstar Group Inc in New York.

Citigroup has received about $45 billion (£31 billion) of taxpayer funds from the Treasury Department's Troubled Asset Relief Program, or TARP, making the bank unlikely to go the way of Lehman Brothers Holdings Inc (LEHMQ.PK).

"Bondholders are figuring that federal regulators would not be prepared to let Citigroup fail abruptly after essentially bailing out the company within the past few months," said Kathleen Shanley, an analyst at independent research service Gimme Credit.

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