Corporate bond offerings worldwide plunged in the third quarterto the lowest level since Lehman Brothers Holdings Inc.'s 2008failure as Europe's sovereign debt crisis caused investors to shunall but the safest securities.

Hewlett-Packard Co., the world's largest maker of personalcomputers, and Santa Clara, California-based chipmaker Intel Corp.led borrowers issuing $543.2 billion of bonds in the past threemonths, according to data compiled by Bloomberg. Issuance fell 41percent from the second quarter and 38 percent from a year ago asofferings by financial firms and junk-rated companies largelyevaporated.

Relative borrowing costs jumped to the highest in more than twoyears after Standard & Poor's stripped the U.S. of its topcredit grade in August and debt swaps signaled a near-certainprobability of Greece defaulting. The Federal Reserve failed toignite issuance after saying it would replace $400 billion ofshort-term debt in its portfolio with longer-term Treasuries tostave off recession and lower interest rates.

“Nobody likes buying debt when everyone's putting out storiesthat Armageddon is around the corner,” Michael Johnson, chiefmarket strategist at Scottsdale, Arizona-based broker-dealer M.S.Howells & Co., said by telephone. “The underlying problems inthe corporate market aren't there, but that's being masked until wecan figure out what Europe's going to do.”

'Risk-Off Sentiment'
The extra yieldinvestors demand to own investment-grade corporate bonds globallyinstead of government debt grew to 264 basis points on Sept. 26,the widest since July 2009, according to Bank of America MerrillLynch index data. Yields for issuers rated below Baa3 by Moody'sInvestors Service and less than BBB- by S&P rose to 9.63percent, the most since December 2009.

“There's a risk-off sentiment that's tied to a lack of abelievable solution in Europe and a lack of any firm guidance onthe U.S. economy from Washington,” said Zane Brown, fixed-incomestrategist at Lord Abbett & Co. in Jersey City, New Jersey.“The cynics in fixed income are waiting to see proof before theybuy in again.”

Elsewhere in credit markets, SLM Corp., the student lender knownas Sallie Mae, plans to sell $817 million of bonds backed bystudent loans after relative yields jumped. Flexera Software Inc.increased the discounts at which it's selling $330 million of loansas prices for the debt fell for the fifth time in six days.

Bonds of Charlotte, North Carolina-based Bank of America Corp.were the most actively traded U.S. corporate securities by dealers,with 131 trades of $1 million or more, according to Trace, thebond-price reporting system of the Financial Industry RegulatoryAuthority.

Student Loan Debt
The Sallie Mae securitieswill be tied to debt guaranteed by the U.S. government, accordingto a regulatory filing yesterday. The Newark, Delaware-basedcompany last sold similar debt on May 19, Bloomberg data show.Approximately $14 billion in bonds tied to education loans havebeen issued in 2011, or 12 percent of asset-backed securities soldthis year. About $51 billion of total issuance is tied to autodebt.

Securities backed by student loans are yielding 188 basispoints, or 1.88 percentage points, more than Treasuries, from 168basis points on June 30, according to a Bank of America MerrillLynch index. Spreads expanded to 192 basis points on Sept. 12, thewidest since February.

The Markit CDX North America Investment Grade Index, whichinvestors use to hedge against losses on corporate debt or tospeculate on creditworthiness, decreased 2.4 basis points to amid-price of 138.8 basis points, according to Markit Group Ltd.

Jobless Benefits
The index, which typicallyfalls as investor confidence improves and rise as it deteriorates,declined after applications for jobless benefits in the U.S.dropped by 37,000 in the week ended Sept. 24 to 391,000, the fewestsince April.

The Markit iTraxx Europe Index of credit-default swaps linked to125 companies with investment-grade ratings jumped 8.5 basis pointsto 199.25, according to JPMorgan Chase & Co. at 11:30 a.m. inLondon.

Credit swaps pay the buyer face value if a borrower fails tomeet its obligations, less the value of the defaulted debt. A basispoint equals $1,000 annually on a contract protecting $10 millionof debt.

The S&P/LSTA U.S. Leveraged Loan 100 index decreased 0.09cent to 89.07 cents on the dollar. The measure, which tracks the100 largest dollar-denominated first-lien leveraged loans, hasdropped from 94.22 on June 30 and fell to 87.47 on Aug. 26, thelowest level since December 2009.

Flexera Buyout Loans
Flexera, the businesssoftware management company that's being acquired by the OntarioTeachers' Pension Plan, is proposing to sell a $230 millionfirst-lien loan at 96 cents to 97 cents on the dollar, reducingproceeds for the company and boosting the yield to investors,Bloomberg data show. That compares with 98 cents initially offered.The debt will now pay 6 percentage points to 6.25 percentage pointsmore than the London interbank offered rate compared with the 6percentage points initially contemplated.

The Schaumburg, Illinois-based company is also marketing a $100million second-lien term loan at 92 cents to 93 cents on thedollar, compared with 98 cents initially proposed. The slice willpay 9.75 percentage points to 10 percentage points more than Libor,compared with 9.25 percentage points initially offered. First-liendebt is repaid first in a bankruptcy or liquidation, second-lienloans are repaid next.

In emerging markets, relative yields fell 6 basis points to 441basis points, according to JPMorgan Chase & Co.'s EMBI Globalindex. The index has expanded from 259 basis points on Jan. 5 and289 since the end of June.

Bond Offerings
Corporate bond offerings inthe U.S. fell to $192.5 billion in the third quarter versus $314.7billion in the three months ended June 30, Bloomberg data show.Issuance rebounded to $71.3 billion in September after falling lastmonth to the lowest level since May 2010.

Palo Alto, California-based Hewlett-Packard, raised $4.6 billionof debt on Sept. 13 in a four-part offering, Bloomberg data show.Its $1.3 billion of 3 percent, five-year notes paid a spread of 215basis points, compared with a 90 basis point spread on bonds with asimilar maturity sold four months earlier. Intel, the world'sbiggest manufacturer of computer chips, sold $5 billion of five-,10- and 30-year bonds on Sept. 14 in its first offering ofnon-convertible debt since 1987, Bloomberg data show.

U.S. junk-bond issuance fell 72 percent to $25.1 billion in thethird quarter, the least since speculative-grade borrowers sold$12.2 billion during the three months through March 2009. Offeringsof the debt all but froze in August at $1 billion after S&P cutthe U.S. credit rating by one notch from AAA. Companies priced $18billion of high-yield bonds in July.

Junk Bond Spreads
Spreads on U.S.speculative-grade bonds expanded 261 basis points in the thirdquarter to 803 on Sept. 29, the widest since 811 in October 2009,Bank of America Merrill Lynch index data show. Relative yields oninvestment-grade debt widened 90 basis points to 254, the datashow.

“The way investors looked at the third quarter was theybasically went back to the playbook from 2008 and 2009 and saidwhat matters the most was protecting their capital,” said Jim Caseyco-head of syndication and leveraged finance at JPMorgan, whichhelped manage 13.1 percent of U.S. junk-debt offerings in thequarter, more than any other bank, Bloomberg data show. “They werevery concerned about principal and not particularly worried aboutincome.”

Banks worldwide issued $280.2 billion of debentures thisquarter, the least since they sold $204 billion in the final threemonths of 2002, Bloomberg data show.

Deutsche Bank Sale
Deutsche Bank AG,Germany's biggest lender, sold 1.5 billion euros ($2.04 billion) oftwo-year floating-rate notes yesterday that were priced at 98 basispoints more than Euribor, in the first sale of public, seniorunsecured bonds by a European bank in more than two months. TheFrankfurt-based bank raised 118.6 million euros by sellingfloating-rate securities to domestic investors in July, paying nopremium to Euribor, Bloomberg data show.

Turmoil in the region had deterred issuers from tapping themarket as spreads on European investment-grade corporate bondswidened 144 basis points to the most since May 2009. Spreads onBank of America Merrill Lynch's EMU Corporate Index were at 313basis points on Sept. 26 and narrowed to 307 basis points throughSept. 28.

Investment-grade bond sales since the start of July dropped to55.7 billion euros, down 58 percent on the previous quarter and 62percent from the third-quarter last year, Bloomberg data show.

Portugal, Ireland Cuts
Moody's cut Portugal'sdebt ranking to Ba2, the second level of junk, from Baa1 on July 5.The ranking company downgraded Ireland to Ba1 from Baa3 a weeklater. It lowered Greece's rating to Ca on July 25 and S&Preduced its grade to an equivalent CC two days later.

Contracts protecting against a default by the country for fiveyears rose to 60.6 percent upfront, according to data provider CMA.That's in addition to 5 percent a year, meaning it would cost $6.06million initially and $500,000 annually to protect $10 million ofGreece's debt. The prices signaled a 98 percent chance of defaultwithin five years on Sept. 12, up from about 80 percent on June30.

While German lawmakers yesterday ratified expanded powers forthe region's 440 billion-euro rescue fund to prevent a default,investor concern has mounted the economic recovery is falteringamid the ongoing sovereign debt turmoil.

'Broken' Bond Market
“We're still very muchin the middle of an illiquid, broken corporate bond market,” SimonBallard, a credit strategist at RBC Capital Markets in London, saidby telephone. “Cash and capital preservation are still some of thekey driving strategies behind investment and for that reasonissuance has been very muted.”

The U.S. economy grew at a 1.3 percent pace in the secondquarter, faster than the 1.2 percent median forecast of economistssurveyed by Bloomberg, revised Commerce Department figures showedyesterday. Gross domestic product may expand at a “very modest” 2percent rate in the second half of this year as Europe's crisiscreates a “drag on growth,” wrote Adrian Miller, a New York-basedfixed-income strategist at Miller Tabak Roberts Securities LLC, inan e-mail yesterday.

“Market sentiment would suggest that a Greek default or arestructuring of some kind has been anticipated,” Justin D'Ercole,head of investment-grade syndicate for the Americas at BarclaysCapital in New York, said in a telephone interview. “Theuncertainty around how that's going to play out is what's holdingall markets up.”

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