The cost of protecting the world’s corporate debt against default rose sharply on Tuesday, as investors reacted to a swathe of negative headlines related to the beleaguered housing and credit markets.
In the US, the benchmark Markit CDX IG index of investment-grade corporate debt widened by 7.5 basis points to 97.5bp after Fannie Mae posted a third consecutive quarterly loss and said it would seek to raise $6bn in fresh capital. Five-year credit defaults swaps on Fannie’s debt rose by about 16 per cent to 50bp - or $50,000 a year.
Elsewhere in the US mortgage sector, Countrywide’s CDS continued to widen as the uncertainty around Bank of America’s $4bn commitment to acquire the lender increased. Friedman, Billings, Ramsey analyst Paul Miller said if Bank of America did not abandon the deal it faced $20bn-$30bn in writedowns on Countrywide’s home loans. Moreover, BofA has made no assurance that Countrywide’s existing debt would be “redeemed, assumed or guaranteed”. In a filing on May 1, BofA said it was “evaluating alternatives for the disposition of the remaining Countrywide indebtedness,” including allowing it to remain outstanding as obligations of Countrywide (and not Bank of America).”
On the European front, the Markit iTraxx Crossover index of 50 mostly junk-rated companies added 31bp to 428bp in afternoon trade, meaning it would cost €428,000 annually to insure against the risk of these companies defaulting on their debt over five years.
News that UBS would slash its workforce and sell assets did little to help sentiment; and Swiss Re further upset investors with a SFr819m mark-to-market loss on CDS.
And in Asia, downbeat comments from Ben Bernanke sent the Markit iTraxx Asia ex-Japan high-yield index 10bp wider to 432bp, while the region’s investment-grade index added 2bp to 91.5bp. Markets in Japan were closed for a holiday.
In a speech at New York’s Columbia Business School last night, the Fed chairman said rising mortgage foreclosures and falling house prices in the US threatened to undermine the financial system.
