Bear funding woes stall credit rally

European credit derivative indexes gave up most of their earlier gains on Friday, with financials hit hardest after the announcement of emergency funding for US investment bank Bear Stearns. J.P. Morgan and the Federal Reserve Bank of New York said they would provide secured funding for Bear Stearns up to 28 days after the bank said its liquidity position had "significantly deteriorated."
"Our liquidity position in the last 24 hours had significantly deteriorated. We took this important step to restore confidence in us in the marketplace, strengthen our liquidity and allow us to continue normal operations," said Bear Stearns Chief Executive Alan Schwartz.
Debt protection costs of Bear Stearns, Lehman Brothers and Citibank surged. Shares in Bear Stearns, the fifth largest US investment bank, dropped as much as 50 percent. One trader said some banks had stopped trading with Bear Stearns. "There are five or six banks that have said that they won't take them (Bear Stearns) as counterparty now because they might not be there tomorrow," the trader said.
Commerzbank, J.P. Morgan and RBS are among those banks, he said. All three banks declined to comment. Simon Ballard, global credit strategist at ABM Amro Asset Management said: "There's no problem with solvency at the bank itself, it's the counterparty risk that has accelerated and triggered today's events," he said.
Just a day earlier, Bear Stearns had sought to soothe the market over the state of its liquidity. By 1652 GMT, the investment-grade Markit iTraxx Europe index was at 156 basis points, according to data from Markit, 3 basis points narrower than late on Thursday. But the index was volatile, swinging in a 10 basis point range as the Bear Stearns headlines were digested.
The Markit iTraxx five-year senior financials index was at about 156 basis points, a trader said, 5 basis points tighter. That index had nudged above the Europe index, hitting more than 160 basis points at one point.
The Markit iTraxx Crossover index, made up of 50 mostly "junk"-rated credits, was at 614 basis points, 11 basis points tighter but had traded in a 20 basis point range. Traders said they were surprised that indexes had not widened more sharply. "It may just be because people haven't quite figured out what is going on. I think we'll be wider on Monday," the trader said.