Ignoring Goodyear’s strong rise in first-quarter earnings on May 4, credit investors have sold off the company’s bonds, pushing prices lower over the past two months.

Goodyear’s 7.86% notes due in 2011 have fallen to 91.7 cents on the dollar from a high this year of 99.5 cents on May 9, according to MarketAxess.

The cost of protecting Goodyear’s debt for five years has risen by about 75 basis points over the past month to about 424 basis points, or $424,000 for every $10 million of principal protected.

Though cost savings from plant closures and job cuts have improved Goodyear’s earnings, the company is facing higher pension contributions and will also need concessions from the United Steelworkers union to continue the improvements, analysts said.

Goodyear’s labor contract expires July 22, and as the weakest of the large tire makers, the company will face a major challenge this labor round, according to fixed-income research service CreditSights.

That is because the steelworkers are using talks with Michelin’s BFGoodrich to set a pattern for other tire makers, and Michelin could strike a deal that puts pressure on more financially vulnerable companies, CreditSights said in a recent report.

Although Goodyear was not picked as the target for the pattern bargaining, it is continuing negotiations with the union, Goodyear spokesman Keith Price said.

"Negotiations will continue in Cincinnati until a new agreement is reached," he said.

Worry over labor stress is one of several reasons the bonds have been sagging, CreditSights senior analyst Glenn Reynolds said in an e-mail message.

Labor and manufacturing costs are hard to ramp down without off-shoring, and that is "the type of thing that makes unions crazy," said Reynolds. Off-shoring is also difficult in a capital-intensive industry because "you cannot just pick up and go," he said.

High raw material costs, questions about the consumer’s ability to absorb more price increases from tire companies and uncertainty about the final form of pension legislation, are also weighing on the bonds, he said.

Goodyear has estimated that pension contributions could total $650 million to $875 million this year, though the sum will depend on pension legislation making its way through Congress.

Pension contributions in 2006, 2007 and beyond will be a material cash drain, hurting Goodyear’s efforts to improve its balance sheet, Kip Penniman, analyst for high-yield research firm KDP Investment Advisors, said in an e-mail message.

Penniman also said he sees limited relief from raw material cost pressures this year and that the next several quarters will likely reflect higher-cost materials purchased months earlier as the costs move from inventories to sales.

Raw material costs have been an issue for the entire industry, and Goodyear has implemented several price increases in an effort to offset those costs, Goodyear’s Price said.