NEW YORK - The overall sentiment on auto bonds has shifted from neutral to reverse recently as car makers find it harder to sell cars in a market gripped by war worries.
A flurry of shaky news from General Motors and Ford Motor Co. coupled with widespread geopolitical concern that has weighed on consumers and investors has weakened views on the piles of debt issued by the car makers and their finance arms.
In addition, worries about potential credit downgrades have risen in recent weeks, fueling perceptions that holding Detroit debt may be getting riskier.
Although the outlook has skidded, nervous investors are likely to continue to bet on the world's two biggest car markers. GM, Ford and their finance arms have combined short- and long-term debt of about $370 billion.
"As long as people can stomach the volatility, there's still a lot of value in the bonds, especially the short-term ones," said Brian Fox, a fixed income analyst with McDonald Investments in Cleveland.
"The sector, in general, has been under pressure for several years because of the competition and the overcapacity," said Steven Bocamazo, vice president of fixed income research for Loomis, Sayles & Co. in Boston.
"If you're in a sector that hasn't been as strong as it has been historically, you expect the volatility to be a little more extreme in these kinds of conditions," he added.
GM and Ford and their respective finance units, General Motors Acceptance Corp. and Ford Motor Credit, argue that the markets have acted irrationally on pieces of bad news and that they are being overly punished by the war rumors.
"We know that the current Ford Motor Credit bond spreads ... don't really reflect the fundamentals of our business," Ford Motor Credit spokesman Dan Jarvis said.
He said Ford's finance unit continues to have access to a bevy of funding options.
"Our credit loss reserves are appropriate and we will continue to be a profitable business," Jarvis said.
That optimism, however, is not shared in the markets, where handwringing abounds about the possibilities of sustained high oil prices, a prolonged war with Iraq and a potential conflict with North Korea, all of which would do more damage to the auto sector.
On the other hand, if the world gets safer in a hurry, it could signal a turnaround in the bond markets.
"If we have a short war or no war and we catch bin Laden and a barrel of fuel comes back down to the $20s, then sentiment could shift for the autos, not because all the fundamentals would be rosy, but there's just a lot of bad news priced into the bonds," said Carl de Jounge, Deutsche Bank's director of high-grade bond research.
Credit rating agencies Standard & Poor's and Moody's this week reaffirmed their long- and short-term ratings on the $125 million of securities issued by Ford and its finance unit, though both maintain a negative outlook.
De Jounge and others anticipate downgrades later this year because they don't think the automakers will hit certain performance numbers the ratings agencies are seeking. Most investors, though, said they believe Ford and GM will remain at the bottom end of investment grade this year.
GM's debt hasn't suffered as much in recent weeks as Ford's, and GM credits its productivity enhancements and car quality improvements. As for its underfunded pension plan, which is one of the largest concerns in the debt markets, GM says it is a primary focus.
"The important thing to keep in mind with pensions is that it's a long-term situation," GM spokesman Jerry Dubrowski said. "A few years ago we were overfunded and the equities markets put us in the negative and that didn't happen overnight and we're not going to get out of it overnight."