Market confidence erodes

Bloomberg

refid:10408455 ilişkili resim dosyası

Global credit markets halted to a standstill as investors’ confidence that governments may be able to stem the financial crisis, while U.S. stocks sank and benchmark indexes slid to their lowest levels since 2003, dragging Asian and European equities yesterday.

Credit markets, from commercial mortgages to junk bonds fell to record lows as concerns grew that the slowing economy would overwhelm government efforts to stem the worst financial crisis since the Great Depression.

The average yield on high-yield, high-risk debt rose beyond 20 percent for the first time in two decades. Top-rated securities backed by subprime and commercial mortgages fell and loan prices declined as U.S. automakers lobbied Congress for government aid to stave off bankruptcy.

Yields rose relative to benchmark rates after economic data showed the recession is deepening and the heads of the largest U.S. carmakers warned they may fail without government funds. Treasury Secretary Henry Paulson said he probably won't spend the second half of a $700 billion rescue package on troubled assets, sparking concern that prices may decline even further.

Tremendous pressure
"Everything is under a tremendous amount of pressure," said Jamie Jackson, who oversees government and agency debt trading at Minneapolis-based RiverSource Investments.

Prices of leveraged loans and high-yield bonds fell as General Motors, Ford Motor and Chrysler renewed pleas yesterday for government aid to prevent their failure in what GM Chief Executive Officer Rick Wagoner said would be a "catastrophic collapse" for the economy.

The price of the Markit LCDX index linked to U.S. leveraged loans, which falls as sentiment worsens, dropped 2 1/2 percentage points to a mid-price of 79.75 percent of face value, after earlier falling to a record low of 79.5, according to Goldman Sachs Group.

"It's not just the Big Three," said Randy Schwimmer, managing director and head of capital markets for New York-based Churchill Financial Group, referring to GM, Ford and Chrysler. "The impact it would have on suppliers, manufacturers and the potential rise in unemployment is adding to the negative tone."

The average yield on high-yield, high-risk debt rose to 20.14 percent Wednesday, from 19.74 percent on Nov. 17, the previous record, according to Merrill Lynch's U.S. High Yield Master II index. The level rose to 20.73 percent, the highest since Merrill began collecting overall yield data in January 1986.

"Prices are in a virtual freefall," said Martin Fridson, chief executive officer of money management firm Fridson Investment Advisors in New York. "Either the market is right and expecting a default rate considerably higher than it was in the Great Depression, or we have such profound dislocations and selling pressures going on that it really is creating extraordinary fundamental value."

Commercial-mortgage securities are also plunging following reports Tuesday that two borrowers with $334 million of loans bundled into bonds were about to default.

The cost of credit-default swaps on AAA rated bonds rose 161.8 basis points to 714 basis points based on the latest Markit CMBX index contracts, according to Markit Group.

Credit-default swaps are financial instruments based on bonds and loans that are used to speculate on a company's ability to repay debt. They pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements. A rise indicates deterioration in the perception of credit quality; a decline, the opposite.

Yields on the safest types of AAA rated commercial-mortgage bonds rose 77 basis points to a record 1,195 basis points more than benchmark swap rates, after jumping a record 264 basis points Tuesday, according to Bank of America. A basis point is 0.01 percentage point.

USstocks sink to new lows
Meanwhile, U.S. stocks sank and benchmark indexes slid to their lowest levels since 2003 on Wednesday. Citigroup tumbled 23 percent to $6.40, a 13-year low, on a plan to buy $17.4 billion of troubled investment-fund assets. General Motors. slid 9.7 percent to its lowest price since the 1940s, while Ford Motor lost 25 percent. Fourteen companies in the Standard & Poor's 500 Index fell 20 percent or more.

The S&P 500 plunged 6.1 percent to 806.58 and extended its 2008 retreat to 45 percent, poised for its worst year since 1931. The Dow Jones Industrial Average lost 427.47 points, or 5.1 percent, to 7,997.28. The Nasdaq Composite Index decreased 6.5 percent to 1,386.42. Thirty stocks fell for each that rose on the New York Stock Exchange, where 1.6 billion shares changed hands, 8.6 percent more than the three-month average.

"Hideous day," said Bill Stone, who oversees $56 billion at PNC Wealth Management. "It's hard to put a basement on this thing."

Both the Dow and the S&P 500 retreated to their lowest levels since March 2003, while the Nasdaq slid to its lowest since April of that year.

Treasuries rose, led by longer-term securities, as investors sought safety after the biggest fall in consumer prices on record. The difference between yields on 10-year Treasury Inflation Protected Securities and conventional notes, which reflects the outlook for consumer prices, was 38 basis points, near the least since Bloomberg began tracking the data in 1998.

The MSCI World Index has fallen 49 percent in 2008, as writedowns and credit losses topped $966 billion since the beginning of the financial crisis.