European credit derivative markets sold off on Wednesday morning along with other risky assets such as equities after Bear Stearns sparked greater concern about sub-prime related losses for hedge funds and structured investment vehicles the previous evening.
The iTraxx Crossover index, the best barometer of risk appetite in credit markets, saw the cost of protecting €10m worth of junk rated European debt jump by as much as €36,000 to €324,000 annually on a five year contract before settling back down towards €312,000, traders said.
Worries were centred around the valuation of sub-prime related products after Bear Stearns finally released to investors the valuation of their two hedge funds that were massively exposed to such debt. Those investors have basically lost their shirts.
The fall-out from these problems is affecting everything from the value of the US dollar to stock markets and the ability of private equity firms to fund their buy-outs. Both Alliance Boots and Chrysler look set to increase the amount of interest they will have to pay to get their massive debt deals away.
Analysts and traders expect the rest of the day’s trading to be heavily influenced by the mood in US stock markets and the tone of Fed chairman Ben Bernanke’s testimony to congress later in the day.