Oct. 17 (Bloomberg) -- The risk of owning corporate debt rose on concerns that losses from the worst housing slump in 16 years will be deeper than anticipated, according to credit- default swaps traders.
A benchmark credit-default swap index climbed after housing starts fell to a 14-year low and the Mortgage Bankers Association's chief economist warned a decline in lending has ``a ways to go.'' Contracts on mortgage insurers MGIC Investment Corp. and PMI Group Inc. rose after MGIC reported its first quarterly loss on writedowns of subprime debt.
The housing data from last month helped spark concerns that a recent credit rally following the Federal Reserve's interest- rate cut on Sept. 18 is over. Risk perceptions had fallen to a three-month low.
``Get ready for the back side of the hurricane,'' said David Castillo, who trades structured finance at Further Lane Securities in San Francisco. ``We, the stock market included, have been in the eye of the hurricane for the last 30 days.''
The CDX North America Investment Grade Series 9 Index, a measure of the cost to protect bonds from default, climbed 2.25 basis points to 51.5 basis points, indicating an increase in perceived risk, after rising as high as 55.25 basis points, according to Deutsche Bank AG in New York.
Leveraged Loan Market
The LCDX Series 9 index, a gauge of confidence in the U.S. leveraged loan market that falls as investor confidence deteriorates, dropped 0.45 point to 99.55, according to Goldman Sachs Group Inc.
Contracts on securities firms including Lehman Brothers Holdings Inc. climbed the most in two months. Contracts on Washington Mutual Inc., the Seattle-based savings and loan that reported a 72 percent drop in profit today because of bad home loans, rose to the highest in two months.
In Europe, credit-default swaps on the iTraxx Crossover Series 8 Index of 50 companies with mostly high-risk, high-yield credit ratings increased 12 basis points to 300 basis points, according to JPMorgan Morgan Chase & Co. The iTraxx Europe index of 125 investment-grade companies rose 3 basis points to 34.25 basis points.
A basis point on a credit-default swap contract protecting $10 million of debt from default for five years is equivalent to $1,000 a year.
Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a company fail to adhere to its debt agreements.
Subprime Market Collapse
Credit markets suffered the biggest rout in almost a decade as the subprime mortgage market collapsed. Subprime loans are given to borrowers with poor credit or high levels of debt. After the Fed cut its benchmark interest rate by a half-percentage- point, credit markets rallied into the first two weeks of October.
``Everybody thinks that the prescription written by the Fed in terms of the provisional liquidity has cured the patient,'' said Peter Plaut, an analyst at Sanno Point Capital Management, a New York hedge-fund manager. ``The patient clearly isn't cured.''
Cheyne Finance Plc, the structured investment vehicle shut out of the commercial paper market in August because of concerns about subprime assets, may not be able to pay its debts, receivers from Deloitte & Touche LLP said.
Washington Mutual, the biggest U.S. savings and loan, said today that third-quarter profit fell to $210 million from $748 million as it wrote off bad mortgages. Credit-default swaps on Seattle-based Washington Mutual climbed 15 basis points to 125 basis points after rising earlier to as high as 145 basis points, according to broker Phoenix Partners Group in New York.
More Charges?
Milwaukee-based MGIC said today it had a third-quarter net loss of $372.5 million after a $303 million writedown of its Credit-Based Asset Servicing and Securitization LLC, a joint venture with insurer Radian Group Inc. UBS credit analyst David Havens maintained a recommendation that investors buy credit- default swap protection on MGIC on concerns there may be more charges to come.
Credit-default swaps on MGIC climbed 45 basis points to 210 basis points, after rising as high as 225 basis points, Phoenix prices show. Contracts on PMI widened 21 basis points to 150 basis points, according to CMA Datavision. Radian rose 43 basis points to 433 basis points, CMA data show.
Credit-default swaps tied to Lehman Brothers Holdings Inc., the biggest U.S. underwriter of mortgage bonds, rose 13 basis points to 90 basis points, according to Phoenix.
Merrill Lynch & Co., which said earlier this month it will post its first quarterly loss since 2001 after writedowns on assets including mortgage securities, climbed 13 basis points to 70 basis points.
`Tough Times'
CIT Group Inc. the largest U.S. independent commercial finance company, said today it had a $38.8 million third-quarter loss because of costs to close its subprime home-loan unit. Contracts tied to New York-based CIT rose 10 basis points to 180 basis points, Phoenix price show.
``These are tough times,'' Douglas Duncan, the mortgage association's chief economist, said in a meeting with reporters at the group's annual convention in Boston. ``We have a ways to go in the housing recession, and it's a deep recession.''
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