American credit market outlook

Credit markets are concerned that MBIA Inc could be the next company to get AIG-ed, but investors with strong stomachs may wish to jump into the credit, traders said on Friday. The cost of protecting MBIA's double-A rated debt against default has surged 80 percent since Wednesday, and now trades at levels more than twice as high as lower-rated insurance companies. MBIA said late on Wednesday that it had been subpoenaed by New York Attorney General Eliot Spitzer and the Securities and Exchange Commission to provide information pertaining to four matters, including Channel Reinsurance Limited of which MBIA is a partial owner.
Earlier on Wednesday, American International Group Inc acknowledged accounting errors that could stretch back 14 years, leaving investors generally skittish about insurance companies.
The request for Channel Re information is particularly worrisome to investors after AIG said on Wednesday that it may be forced to move the assets and liabilities of an offshore reinsurance company onto its balance sheet, eroding up to $1.1 billion of AIG's net worth, analysts said.
So far, there's no evidence that there's any reason to be concerned about these inquiries, an analyst and two traders said.
In all likelihood, these concerns will blow over, and the cost of protecting MBIA's debt against default will fall, the traders said.
The cost of protecting the company's double-A rated debt against default stood at 90 basis points on Friday, or $90,000 a year for every $10 million of debt protected.
That's high compared with the cost of protecting St. Paul Travellers' debt against default, which was 40 basis points on Friday. St. Paul Travellers is rated below MBIA's "double-A" level.
But there could be some serious volatility in MBIA credit, and anyone selling protection in the name should be prepared for turbulence, traders said.
One strategy that may make sense is to sell protection on triple-A MBIA credit, and buy protection on double-A MBIA credit as a hedge, in case the inquiries actually do turn up, a trader said.