European credit spreads widened to record highs on Thursday as stock markets fell, a European credit fund failed to meet margin calls and clouds again hung over US bond insurers. By 1614 GMT, the Markit investment-grade iTraxx Europe index hit a record 141 basis points, according to data from Markit, 14 basis points wider than late Wednesday.
The iTraxx Crossover index, made up of 50 mostly "junk"-rated credits, was at 614 basis points, 33 basis points wider and some 8 basis points off Monday's record 622 basis points. "We're really just following equities. There was also talk of hedge fund liquidations but we seem to get that every day," a trader said.
Shares in Europe were down 1.5 percent while US share indexes fell 1 percent. Spreads opened wider on disappointment that banks had not committed funds to support bond insurer Ambac Financial Group Inc. Ambac announced plans late on Wednesday to sell at least $1.5 billion of stock and convertible securities to help cover billions of dollars of potential claims from insuring bonds backed by subprime mortgages and other risky debt.
But analysts at Goldman Sachs and J.P. Morgan said the new capital was not enough to fix its capital adequacy problem. In previous weeks, people familiar with the matter had said that a group of eight banks, led by Citigroup and UBS, were preparing a bailout plan of $2 billion to $3 billion.
The tone grew more nervous after a unit of private equity firm Carlyle Group said it had not been able to meet some margin calls and had received a notice of default.
"Receiving a margin call is bad news, but not being able to pay it is disastrous," said the trader. Strategists said volatile credit market conditions likely meant more hedge funds would face margin calls in coming weeks. "Margin calls are based on two things: price action, that is standard; but banks may also be tightening credit requirements," said Puneet Sharma, a credit strategist at Barclays Capital.
"Do we expect more of this? Yes, because in general there has been a lot of volatility in credit markets." A positive spin, however, was that markets have deleveraged substantially over the past six or seven months, he said. "We're in a better position. Had the leverage not been reduced in the system, you would have seen hundreds of such cases."
The trader said there was talk in the market of a government bailout of mortgage lenders Fannie Mae and Freddie Mac. But a US Treasury Department spokeswoman said rumours of a possible new government guarantee for them were unfounded. The speculation had driven down prices for US Treasury debt securities, which have been seen as a safe-haven amid the credit market turmoil.
Adding to the jitters, and reviving memories of a trading scandal at French bank Societe Generale, was the suspension of two London equity traders at Lehman Brothers. A Lehman spokesman said it had identified "issues" with some of their trades, but said the sums involved were not material.
"No doubt there will be a liquidation story related to that coming out shortly. It's a bear market," the trader said. Trading volumes had been thin this week, but picked up on Thursday.
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