Credit derivatives markets continued to rally on Wednesday after reports of progress on a rescue plan for Ambac, the bond insurer, cheered investors.
Overnight CNBC said that Ambac was moving towards a deal on recapitalisation but had not yet reached an agreement.
Despite the news, concerns remain about the health of the bond insurers, especially after Ben Bernanke, chairman of the Federal Reserve, yesterday called on banks to forgive chunks of mortgage loans.
BNP Paribas said: “With Fitch raising their loss estimate on subprime to the 21% to 26% range, and Bernanke clearly indicating that there is no near term bottom to housing, it is quite amazing how S&P and Moody’s continue to rate MBIA and Ambac as AAA entities.”
The iTraxx Europe, which measures the cost of protecting 125 investment-grade credits against default, was at 127.1 basis points, 3.2bp lower than Tuesday’s close.
This means it cost €127,100 annually to insure €10m of iTraxx Europe debt over five years.
The iTraxx Crossover, an index of 50 mostly junk-rated credits, fell 11.6bp to 585.8bp.
Tuesday also saw California, one the largest borrowers in the municipal bond market, complete a $1.75bn bond issue without paying for bond insurance. So far this year only 39 per cent of new municipal issues have been insured, compared to 65 per cent in the first two months of 2007.
“This raises question as to whether the market really needs monoline insurers, whose risk of failure still heavily weighs on the credit markets,” BNP said.
