Credit insurance costs soar to record
Credit insurance costs soar to record
By Stacy-Marie Ishmael and Gillian Tett in London, and Saskia Scholtes in New York
Copyright The Financial Times Limited 2007
Published: July 30 2007 20:28 | Last updated: July 31 2007 01:57
The cost of insurance against credit defaults hit record levels on both sides of the Atlantic on Monday amid concerns that some investors were being forced to sell assets to cover losses on subprime mortgages.
In spite of the heightened risk aversion in credit derivatives markets US stocks rose. The Dow Jones Industrial Average closed up 0.7 per cent, the S&P 500 rose 1 per cent and the Nasdaq Composite gained 0.8 per cent.
The FTSE Eurofirst 300 traded in positive territory for much of the session but surrendered its tentative gains by the close. The index fell 2.3 points, or 0.2 per cent, to 1,517.74, extending last week’s sharp fall which dragged the index to its lowest level for four months.
The iTraxx crossover index, which tracks the cost of protecting a basket of risky European companies against default, rose more than 60bp on Monday to trade above 500bp for the first time.
That means it now costs €500,000 ($685,000) to insure against the default of €10m of bonds. Last week it would have cost less than €400,000. This was the largest one-day move yet seen, leaving the index at more than double its level in June.
Similar dramatic swings occurred in US credit derivatives, where the CDX index of investment-grade bonds was quoted 20bp higher to cross 100bp for the first time on Monday, before settling at 87bp.
Analysts warned that the financial markets could stay jittery in coming days, since the credit turmoil could force more financial institutions to offload troubled assets.
“At a minimum, credit travails are apt to create a higher volatility environment across all asset classes for much of this year,” said Alan Ruskin, global strategist at RBS Greenwich Capital. “Credit derivatives liquidity and risk management characteristics are finally being tested in a crisis and are performing poorly.”
The speed of the swing in the credit derivatives markets has shocked many investors, particularly since it has not come amid a sharp deterioration in the macroeconomic background. Some traders consequently blame price swings on hedge funds that may have been rejigging their portfolios before the end of the month.
However, there are also mounting concerns that some investors are being forced into liquidations because prime brokers are trimming credit lines to groups with heavy exposure to subprime mortgages.
By Stacy-Marie Ishmael and Gillian Tett in London, and Saskia Scholtes in New York
Copyright The Financial Times Limited 2007
Published: July 30 2007 20:28 | Last updated: July 31 2007 01:57
The cost of insurance against credit defaults hit record levels on both sides of the Atlantic on Monday amid concerns that some investors were being forced to sell assets to cover losses on subprime mortgages.
In spite of the heightened risk aversion in credit derivatives markets US stocks rose. The Dow Jones Industrial Average closed up 0.7 per cent, the S&P 500 rose 1 per cent and the Nasdaq Composite gained 0.8 per cent.
The FTSE Eurofirst 300 traded in positive territory for much of the session but surrendered its tentative gains by the close. The index fell 2.3 points, or 0.2 per cent, to 1,517.74, extending last week’s sharp fall which dragged the index to its lowest level for four months.
The iTraxx crossover index, which tracks the cost of protecting a basket of risky European companies against default, rose more than 60bp on Monday to trade above 500bp for the first time.
That means it now costs €500,000 ($685,000) to insure against the default of €10m of bonds. Last week it would have cost less than €400,000. This was the largest one-day move yet seen, leaving the index at more than double its level in June.
Similar dramatic swings occurred in US credit derivatives, where the CDX index of investment-grade bonds was quoted 20bp higher to cross 100bp for the first time on Monday, before settling at 87bp.
Analysts warned that the financial markets could stay jittery in coming days, since the credit turmoil could force more financial institutions to offload troubled assets.
“At a minimum, credit travails are apt to create a higher volatility environment across all asset classes for much of this year,” said Alan Ruskin, global strategist at RBS Greenwich Capital. “Credit derivatives liquidity and risk management characteristics are finally being tested in a crisis and are performing poorly.”
The speed of the swing in the credit derivatives markets has shocked many investors, particularly since it has not come amid a sharp deterioration in the macroeconomic background. Some traders consequently blame price swings on hedge funds that may have been rejigging their portfolios before the end of the month.
However, there are also mounting concerns that some investors are being forced into liquidations because prime brokers are trimming credit lines to groups with heavy exposure to subprime mortgages.
posted by Carlos T Mock @ 6:20 AM
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