As the prospects for the economy deteriorate, the cost of default protection on corporate bonds hit a new high. From Bloomberg:
The cost of protecting corporate bonds from default surged to records around the world as the prospect of U.S. automakers filing for bankruptcy protection fueled concern of more bank losses and a deeper recession.
“Markets are back in crisis mode,” said Agnes Kitzmueller, a Munich-based credit strategist at UniCredit SpA, Italy’s biggest bank. “There is fear in the market.”…
Credit-default swaps on the Markit CDX North America Investment-Grade index jumped 23 basis points to an all-time high 270, according to broker Phoenix Partners Group at 11:15 a.m. in New York. The Markit iTraxx Crossover Index of 50 European companies with mostly high-risk, high-yield credit ratings climbed 37 basis points to 927, having earlier traded at 933, according to JPMorgan Chase & Co. prices in London….
Treasury yields declined to record lows, with two-year notes dropping below 1 percent for the first time, as investors shunned all but the safest assets.
Investors face a “poisonous cocktail” of concerns over the collapse in value of mortgage-related assets in the U.S., Jeroen van den Broek, the Amsterdam-based head of credit strategy at ING Groep NV, wrote in a report today. Treasury Secretary Henry Paulson’s decision to abandon plans to buy toxic mortgage assets has driven the price of the securities to record lows, triggering concern of more losses and writedowns at banks.
Credit-default swaps on New York-based Citigroup Inc. rose 40 basis points to 405, Phoenix prices show. Contracts on Goldman Sachs Group Inc increased 65 basis points to 400 and Morgan Stanley rose 60 to 515.
“Anything’s possible in this market,” said Mark Bayley, a director of credit at ABN Amro Holding NV in Sydney. “You’re seeing sellers of risk and very few buyers. The sellers are becoming more stressed and willing to accept very wide spread levels for corporate bonds.”…
Investors also shunned high-risk, high-yield loans, driving the Markit iTraxx LevX index of credit-default swaps linked to debt financing leveraged buyouts down to a record low of 78.5, BNP Paribas prices show. The current series of the index began trading at 99 on Sept. 29. The benchmark falls as credit risk rises.