European credit derivatives were volatile on Monday amid lingering worries about US subprime mortgage sector - following the shake-out at two mortgage hedge funds owned by Bear Stearns last week.
“Subprime and equity weakness drove spreads wider,” said strategists at Lehman Brothers. The iTraxx Crossover index of junk-rated credits widened to as much as 225 basis points, meaning the annual cost of insuring €10m of a basket of junk-rated credits against non-payment of debt over five years has now climbed to €225,000. The investment-grade main iTraxx Europe remained above 24bp.
Bear Stearns has raised its exposure to the troubled subprime mortgage market, confirming it would extend a $3.2bn loan to one of its two in-house hedge funds suffering from bad subprime bets. “Mortgages are worried that the collapse of the Bear Stearn’s funds may only be the tip of the iceberg,” commented analysts at UBS.
The exposure of Europen banks to US subprime market is unknown, although there are growing fears that the potential fall-out will not be limited to just Wall Street. On Monday, the cost of default protection against the subordinated debt of some European banks, including Deutsche Bank and Credit Suisse, saw some widening.