Key Subprime Index Measures a New Low [WSJ]
By ANUSHA SHRIVASTAVA
July 3, 2007; Page C8
Concerns about loans made to borrowers with poor credit pressured a benchmark derivative index to a new low as investors continued to hedge against a further deterioration in the subprime market.
The riskiest, BBB-minus portion, or tranche, of the current index, known as the ABX.HE, hit a record 52.50 cents on the dollar amid heavy trading, according to Alex Pritchartt, a trader at UBS, before bouncing back to 54 cents in afternoon trade.
"It's very volatile," he said, noting that there was no specific event driving the move.
The index falls when investors buy credit protection on the basket of credit default swaps included in the measure. The CDS reference mortgage bonds backed by subprime loans originated in the second half of 2006 -- a year noted for its lax lending standards.
On Friday, the BBB-minus portion of the ABX index closed at 55 cents on the dollar after trending lower for most of the week as market participants grew more wary following problems at two Bear Stearns Cos. hedge funds that had invested heavily in securities backed by subprime loans.
There is concern that other hedge funds that had similar holdings will post losses or even shut down over the next few weeks once they have revealed to their investors that the value of the underlying securities has diminished.
"There's blood in the water," said Derrick Wulf, a portfolio manager at Dwight Asset Management. "There's definitely agreement among market participants that things would get ugly, but not many people thought it would get this ugly."
Later this week, several hedge funds are expected to report to creditors the value of their holdings, with investments in securities backed by risky home loans expected to post significant losses. If the value falls sharp enough, banks and other investors are expected to ask some hedge funds for their money back, which could spur further declines.
Not all hedge funds will report on the same day, however, and it will take investors some time to digest the information and react.
Treasury Prices Rise; Cerberus Deal Is 'Junk'
Treasury bond prices gained yesterday, sending the yield on the 10-year note back below the key 5% mark, amid continued worries about the fallout from the subprime mortgage market woes. Late yesterday, the benchmark 10-year note was up 9/32 point, or $2.8125 per $1,000 face value, at 96 5/32. Its yield slipped to 4.997% from late Friday's 5.034% as yields move inversely to prices.
Meanwhile, ratings firms assigned speculative-grade, or junk, ratings yesterday to Cerberus Capital Management LP's financing to purchase Chrysler Automotive LLC and DaimlerChrysler Financial Services Americas LLC.
There have been recent jitters over the high-yield market's buyout financings. |
