(Adds GE moves and background)
By Walden Siew
NEW YORK, Oct 10 (Reuters) - Credit markets weakened on Friday, led by banks and insurance companies on concerns about ratings quality, as world stocks plummeted amid continued worry about the deepening financial crisis.
Traders also were nervous about projected losses surrounding an auction to settle an estimated $400 billion in credit default swaps on Lehman Brothers LEHMQ.PK debt that kicked off early Friday.
U.S. investment-grade and high-yield bond spreads traded at record high levels, a sign of investors’ perception of risk. The main U.S. investment-grade credit derivative index widened further to about 217 basis points on Friday, reflecting the edgy tone, from 198.25 basis points late Thursday, according to data from Markit Intraday.
Debt protection costs for Morgan Stanley (MS.N) , General Electric (GE.N) and Merrill Lynch MER.N climbed amid sharp swings in U.S. stock markets, traders said. Merrill Lynch’s five-year credit default swaps traded at 400 basis points versus 365 on Thursday, according to Phoenix Partners Group.
Morgan Stanley’s five-year credit default swaps rose to an upfront payment of 24 percent the sum insured plus 500 basis points a year, from 19 percent on Thursday, according to Phoenix.
That means it would cost $2.4 million to insure $10 million of debt plus $500,000 a year. Moody’s Investors Service on Thursday warned it may cut the long-term debt ratings of Morgan Stanley and Goldman Sachs (GS.N). For details, see [ID:nHKG147209]
“It’s a situation that is outside their control,” said Robbert Van Batenburg, head of research at Louis Capital in New York on Morgan Stanley. “The bottom line in this type of business is that it’s based on trust and when your clients do not have any trust anymore in the sustainability of your company as an ongoing concern they’re going to pull their business away from you.”
GE’s five-year CDS also widened to 600 basis points versus 565 basis points on Thursday, Phoenix Partners said.
GE reported a drop in quarterly profit that matched its recent warning, and the U.S. conglomerate said the global credit crunch and slumping economies would continue to take a toll on its finance business.
Its profit was weighed by a 33 percent fall at GE Capital, overshadowing growth at its infrastructure unit, which were buoyed by solid demand for electricity-generating turbines and jet engines.
“The global financial system is tough,” said Chief Executive Jeff Immelt, on a conference call with investors. “We try to think and do our planning just based on the fact that there’s more risk, just given what’s going on in the global environment.”
Insurers took hits, as the cost of insuring debt issued by Allstate Corp (ALL.N) climbed 93 basis points Friday, leading a broader widening of spreads in the insurance sector.
Five-year credit default swaps on Allstate were last trading at 292 basis points, or $292,000 annually to insure $10 million for five years, up from 199 basis points late Thursday, according to data from Markit Intraday.
Standard & Poor’s said on Friday it was revising its outlook on the U.S. life insurance industry to negative as it expects higher-than-usual credit losses and lower fee-based revenues.
Adding to the gloom, initial results of the auction to determine the value of CDS on Lehman Brothers showed banks, hedge funds and other sellers of protection facing losses in the area of 90.25 percent of the insurance they sold.
The auction marks one of the largest settlements of contracts in the $55 trillion market. [ID:nN10387180].
Other financials were also wider early Friday. Citigroup (C.N) CDS rose to 382.5 basis points from 358.3 basis points late Thursday, according to data from CMA DataVision.
Citi said late Thursday it has abandoned efforts to block Wachovia Corp WB.N from merging with Wells Fargo (WFC.N). Citigroup had sought to acquire part of Wachovia to strengthen its retail banking business.
Wachovia CDS tightened to 261.7 basis points from 290 basis points on Thursday, while Wells Fargo CDS widened to 196.6 basis points from 180 basis points.
CDS on General Motors (GM.N) and its financing arm GMAC were unchanged early Friday, although they continued to trade at distressed levels. GM shares rose after the company said bankruptcy was not an option as it grapples with “unprecedented challenges related to uncertainty in the financial markets.” (Additional reporting by Scott Malone in Boston, Ciara Linnane, Martinne Geller and Karen Brettell in New York, Editing by Tom Hals)