Dec. 3 (Bloomberg) -- General Motors Corp. and Ford Motor Co. bonds rose on optimism that the U.S. government will bail out the auto industry after the companies promised to cut costs and asked Congress for $27 billion in aid.

Bonds of GM due in 2028 rose 23 percent today to a five-week high of 20 cents on the dollar after falling to less than 10 cents on the dollar last week, according to Trace, the Financial Industry Regulatory Authority’s bond-pricing service. Ford Motor Credit Corp.’s 7.25 percent notes due in 2011 have rallied 27 percent since Nov. 24, including an 8 percent jump today to 49 cents on the dollar.

Investors are buying the bonds as automaker executives presented their aid requests to lawmakers and proposed plans to cut costs and slash payrolls.

Government aid for Ford would be “mixed but predominately positive” for unsecured bondholders because it would help the automaker avoid bankruptcy while not necessarily preventing default, Kip Penniman, an analyst at KDP Investment Advisors Inc. in Montpelier, Vermont, said yesterday in a report. Democrats pledged to keep them out of bankruptcy.

“Given the weak state of the economy, Congress will feel compelled to pass some sort of package that supplies a lifeline to the troubled automakers,” said John Lonski, chief economist at Moody’s Investors Service.

Deepening Slump

The deepening auto slump is pushing the companies toward default, which would hurt bondholders by limiting how much of their investments they could recover. Investors have already lost 11 percent this quarter, the worst in at least 11 years, according to Merrill Lynch & Co.’s U.S. Corporates, Automotive index.

GM asked Congress yesterday for $18 billion, including $4 billion this month, to make it through the year. Ford is seeking a $9 billion credit line that it said it may not have to tap.

GM is seeking to reduce total debt of $62 billion, including obligations related to a union retiree health-care fund, to about $30 billion, according to the plan. U.S. employment would fall to as little as 45,000 in 2012 from about 96,000 now under the plan, and Detroit-based GM’s main domestic brands would be pared to four from eight. GM will shrink Pontiac and may sell Saab and Saturn in addition to Hummer.

GM senior unsecured bondholders could recover anything from 14 cents to 43 cents on the dollar depending on whether they are treated the same as the automaker’s health-care liability, Penniman said today in a report. Noteholders may be in for a fight because the United Auto Workers union has balked at reducing the amount of its health-care obligations, he said.

Ford’s proposal includes investing about $14 billion in the next seven years to improve fuel efficiency. The second-largest U.S. automaker also calls for focusing on its namesake brand through efforts such as exploring the sale of its Volvo unit.

To contact the reporter on this story: Bryan Keogh in New York at bkeogh4@bloomberg.net

Last Updated: December 3, 2008 18:14 EST