Probes Hurt Mood in Corporate Bond Market

Regulatory probes are so widespread among U.S. companies now that sentiment in the corporate bond market is souring after a two-year rally.

Nearly 50 major U.S. companies that together have issued almost $500 billion of bonds are under scrutiny by various regulators, most notably New York Atty. Gen. Eliot Spitzer, according to Lehman Bros.

The wave of probes -- such as Spitzer’s latest centered on the insurance business -- has not yet undermined demand for corporate bonds because investors are hungry for more yield than Treasuries offer.

Still, corporate governance is a looming concern, market participants said.

“As a bond investor, one is looking for clean balance sheets and the ability to repay, and accounting scandals hit right at the heart of what we do,” said Steve Bohlin, portfolio manager at Thornburg Investment Management Co. in Santa Fe, N.M.

Companies exposed to some kind of probe, from requests for information to formal investigations, represent nearly 25% of Lehman Bros.’ widely followed bond index by market weight.

The ramped-up regulatory scrutiny may make more companies cautious about boosting hiring and investment, said Moody’s Chief Economist John Lonski. “Upper echelons of management have been compelled to devote more of their energy and effort toward compliance,” Lonski said.

That also could affect investors’ perceptions of companies’ ability to be financially successful long term, analysts said.