Renewed jitters over turmoil in the US sub-prime mortgage market hit sentiment in the European credit derivatives markets on Thursday.
The iTraxx Crossover index opened 8 basis points wider at 210bp, meaning the cost of insuring €10m of a basket of junk-rated credits against non-payment of debt over five years has risen to €210,000 annually.
Lenders struggled this week to sell more than $1bn of assets seized from two Bear Stearns hedge funds that suffered heavy losses on subprime bets.
Among the assets for sale by lenders Merrill Lynch and Deutsche Bank were investments in CDOs, which pool securities that can include mortgage-backed bonds.
The prospect of the “fire sale” knocked down prices for similar mortgage-backed assets and sent a key derivative index for the market to record lows on Wednesday.
Analysts at Markit Group noted that the spreads on MBIA and Ambac, financial guarantors, have widened significantly amid the fallout from the sub-prime mortgage sector. “Both companies have considerable exposure through insuring CDOs and mortgage-backed securities,” Markit Group said.
Meanwhile, the cost of protecting against default the debt of TUI, the German shipping and tourism group, soared. But traders were hard-pressed to know why. The five-year CDS of TUI ballooned out by 25 basis points to 250bp in early trade. But one London-based trader said: “I haven’t seen any news.”