US mortgage fears spark sell-off
By Michael Mackenzie and Saskia Scholtes in New York
Published: July 10 2007 20:55 | Last updated: July 10 2007 23:48
Fears of further problems in the US mortgage industry and the broader economy flared on Tuesday, triggering a sell-off in credit markets as investors sought safe havens.
Markets were rattled when Standard & Poor’s, the ratings agency, threatened to downgrade the credit ratings on some $12bn of bonds backed by US subprime home loans. This raised concerns of a broader repricing of risk in credit markets, leading to heavy losses for some investors, particularly in derivative markets.
Rival rating group Moody’s caused further disquiet after the markets closed when it said it had cut or was reviewing ratings for $5.7bn of mortgage-backed bonds. It downgraded 451 bonds and put another 82 on review.
The dollar tumbled to a record low against the euro, hitting $1.37, and also fell against the yen and sterling after speculation that a slump in the housing market would slow the US economy. The pound traded at $2.02.
US and European stocks sold off dramatically. The S&P 500 closed down 1.4 per cent at 1,510.12.
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Jonathan Birchall on how the housing downturn is hitting Home Depot
Sentiment was hit further by profits warnings from bellwether stocks including DR Horton, the biggest home builder, Home Depot, the largest home improvement chain, and retailer Sears .
The warnings marked a downbeat start to the US second quarter earnings season, raising concerns that the housing market slowdown was hitting company profits. A further jump in oil prices compounded these worries as Brent crude reached $76.63 a barrel to hit an 11-month high.
In reaction, the corporate bond market sold off. At the same time, a closely watched derivative index tracking the riskiest subprime mortgage bonds issued in 2006 hit record lows. Subprime mortgages are issued to people with poor credit histories.
S&P said it had placed 612 classes of subprime mortgage bonds on watch for possible downgrades. At $12bn in all, the bonds represent 2.13 per cent of the $565.3bn in US residential mortgage bonds rated by S&P between the fourth quarter of 2005 and fourth quarter of 2006.
“The level of loss continues to exceed historical precedent and our initial expectations,” said Susan Barnes, credit analyst at S&P. “At this time, we do not see the poor performance abating.”
Ciaran O’Hagan, strategist at Société Générale, said: “We felt over the past few days that the market was gunning for a bout of risk aversion and was just lacking the excuse. Downgrades are a good enough one and the threat will clearly linger for a few months, if not longer.”
S&P also said it would review ratings for collateralised debt obligations, complex debt securities that package the subprime mortgage bonds under review.
Last month, two hedge funds managed by Bear Stearns ran into trouble with their investments in CDOs backed by subprime mortgages.
Additional reporting by Paul J Davies and Joanna Chung in London
Copyright The Financial Times Limited 2007
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