The cost of protecting European corporate debt against default rose on Wednesday after the third hedge fund failure in the space of a week.
Carlyle Capital, a publicly-traded mortgage bond fund, said it received a notice of default after failing to meet margin calls from banks, stoking fears of a wave of hedge fund liquidations and fire sales of assets.
On Tuesday Focus Capital, a $1bn fund in New York, said it was forced to liquidate its portfolio after missing margin calls. Friday saw the implosion of Peloton Partners, a $2bn London-based fund.
Analysts are worried that they represent the tip of the iceberg.
The iTraxx Europe, which measures the cost of protecting 125 investment-grade credits against default, hit 126bp in morning trade, about 7bp higher than late on Tuesday. This means it cost €126,000 per year to insure €10m of iTraxx Europe debt over five years.
The iTraxx Crossover, an index of 50 mostly junk-rated credits, rose 16bp to about 580bp.
Meanwhile, Ambac, the bond insurer, revealed a $1.5bn recapitalisation plan that disappointed investors hoping for a bigger rescue effort.
“The Ambac capital raising fell way short of expectations,” said Laurent Fransolet, analyst at Barclays Capital. “Indeed, if even the potential “good news” disappoints, then it is difficult to see what can turn around the deteriorating sentiment and liquidity in the markets.”
“Liquidity is as bad as it has been since the beginning of the crisis, and problems are increasingly reaching new segments of the markets.”