Oct. 31 (Bloomberg) -- Almost three weeks after the government threw its guarantee behind new bank bonds, no U.S. finance company has braved the market.

While Citigroup Inc., JPMorgan Chase & Co. and Bank of America Corp. were the three largest U.S. banks issuing debt last year, they haven't sold dollar-denominated corporate bonds since August. Barclays Capital analysts estimated on Oct. 20 banks would sell as much as $600 billion of debt within six months using the U.S. guarantee.

The delay is frustrating investors who expected government backing would spur banks to sell bonds, said Gregory Habeeb, a money manager at Calvert Asset Management Co. in Bethesda, Maryland. At the same time, yields over benchmark rates on investment-grade and high-yield debt are near record highs and the U.S. corporate bond market has remained all but shut.

``Rome is burning,'' said Habeeb, who helps oversee $8.5 billion. ``So are we going to watch it burn? If we have the fire truck, then wheel out the fire truck and start spraying the water.''

Banks are hamstrung because they're waiting for the ``fine print,'' said Ira Jersey, an interest-rate strategist at Credit Suisse Group AG in New York. Because they don't know if the debt will be guaranteed under all circumstances, bonds are difficult to price, he said. By contrast, Barclays Plc and Bank of Scotland Plc both sold debt this month under a similar program in the U.K.

The Federal Deposit Insurance Corp. said Oct. 14 it would guarantee three-year senior unsecured bank debt issued through June 30, 2009 as part of a broader plan by the U.S. Treasury that included expanded deposit insurance and $250 billion of direct capital injections for U.S. banks.

Default Terms

Interim FDIC rules released Oct. 23 granted participating banks the option of selling debt without government guarantees for an extra fee. The rules are still subject to change following a 15-day comment period. The cost of capital for the banks will be ``highly dependent'' on the strength of the government's guarantee, Jersey said. Bank lawyers are still haggling with the FDIC over which specific conditions would trigger insurance for creditors, he said.

``What constitutes a default?'' Jersey said. ``That's the big thing.''

The FDIC will charge a 75 basis-point fee on guaranteed debt, and estimates banks may issue as much as $1.4 trillion under the program, including inter-bank lending, promissory notes, commercial paper and bonds. That could cost the banking industry up to $9.75 billion in insurance fees. A basis point equals 0.01 percentage point.

Banks have until Nov. 12 to decide if they don't want to participate in the program, said Diane Ellis, deputy director for the division of insurance and research at the FDIC in Washington.

`Information-Gathering Mode'

``My impression from the banks we've talked to is they're all in information-gathering mode, trying to understand how the program is going to work, trying to weigh the costs and benefits for themselves,'' she said.

Christina Pretto at Citigroup, Joseph Evangelisti at JPMorgan Chase and Scott Silvestri at Bank of America declined to comment on if or when the banks may issue government-guaranteed bonds. Carissa Ramirez at Morgan Stanley and Michael Duvally at Goldman Sachs Group Inc. also declined to comment. Citigroup, JPMorgan, Morgan Stanley and Goldman are based in New York. Bank of America is based in Charlotte, North Carolina.

Banks dominated corporate bond sales last year, accounting for 71 percent of $1.02 trillion of investment-grade new issuance, according to data compiled by Bloomberg. As the credit seizure deepened and yields over benchmark rates soared to records, banks were forced out of the market. No major U.S. bank has sold debt since Sept. 3.

Paulson's Backstops

The extra yield over benchmarks on bank bonds narrowed 47 basis points from a record wide on Oct. 13 to 678 basis points as of yesterday, according to a Merrill Lynch & Co. index.

In announcing the backstop and capital injections, Treasury Secretary Henry Paulson said they ``demonstrate that the government will do what is necessary to restore the flow of funds on which our economy depends.''

The absence of sales marks a setback to Paulson's efforts to open up credit markets, Habeeb said.

Companies sold $6.6 billion of bonds this week, ending the slowest month for investment-grade issuance since July 2002, according to data compiled by Bloomberg. The extra yield investors demand to own investment-grade debt widened to a record 618 basis points on Oct. 29, before falling 1 basis point yesterday, according to Merrill's U.S. Corporate Master index.

Verizon, Kimberly-Clark

New York-based Verizon Communications Inc., the second- largest U.S. telephone company, accounted for about half the week's issuance with a $3.25 billion sale of 10- and 30-year debt. Bloomberg data show. Kimberly-Clark Corp., the Dallas-based maker of Huggies diapers and Kleenex tissues, sold $500 million of 10-year notes.

MGM Mirage, the casino company majority-owned by billionaire Kirk Kerkorian, sold $750 million of notes at a 12.25 percentage point spread in the first speculative-grade bond offering in more than a month, Bloomberg data show. The average spread on high- yield bonds fell 78 basis points to 15.91 percentage points, according to Merrill's U.S. High Yield Master II index. Junk bonds are rated below Baa3 by Moody's Investors Service and BBB- by Standard & Poor's.

To contact the reporters on this story: Gabrielle Coppola in New York at gcoppola@bloomberg.net; John Detrixhe in New York at jdetrixhe@bloomberg.net

Last Updated: October 31, 2008 13:13 EDT