The Markit iTraxx Europe index set fresh all-time highs on Monday as markets took a beating on trader speculation that Bear Stearns was facing liquidity problems. Credit default swaps on Bear Stearns jumped 150 basis points to 590 basis points, but the chairman of the investment bank's executive committee said the market talk was "totally ridiculous".
By 1630 GMT, the Markit investment-grade iTraxx Europe index was at 156.75 basis points, according to Markit data, 10.75 basis points wider versus late on Friday, after hitting life wide levels of 157.75 basis points. Moody's Investors Service on Monday also cut the ratings of 163 tranches from 15 deals issued by Bear Stearns' Alt-A Trust.
But one analyst played down the downgrade: "It's not something to really be concerned about. It (the downgrade) is on mortgages they had issued but they are sitting somewhere else now. They just have Bear Stearns' label on them."
The iTraxx Crossover index, made up of 50 mostly "junk"-rated credits, was around 20 basis points wider at 637.25 basis points. The Crossover index had hit record highs of 650 basis points on Friday on unwinding of structured credit positions and concerns over hedge fund liquidity.
"These moves are coming amid extremely poor flows and even worse liquidity. And in that sense, it's just about as bad as it comes," SG CIB credit strategist Suki Mann said in a note to clients. Strategists at ING echoed this negative view in a note to clients. They said that the prospect of the iTraxx Europe and Crossover index hitting 200 basis points and 750 basis points respectively was "all too likely".
"Last week confirmed that the crisis had moved into another more severe cycle," the strategists said. "The lack of a real bail-out for Ambac combined with the impending iTraxx roll, results and numerous problems on the leveraged fund side of the business is taking asset sale risk, illiquidity and widening pressure to new unprecedented highs."
The cost of insuring FKI's debt against default fell, despite a report in the Sunday Times that US private equity group Blackstone had hired bankers to examine a counter bid for the British engineering group.
By 1447 GMT, five-year credit default swaps on FKI tightened 20 basis points to 580 basis points, a trader said, adding that the involvement of private equity in M&A normally hikes up a company's CDS. In retailers, five-year CDS on Britain's Marks & Spencer's widened 10 basis points to 250 basis points after the retail giant announced a management rejig, a second trader said. The trader, however, stressed that the movement was in line with general market moves.
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