The perceived risk of owning low- rated subprime mortgage bonds surged, rising for a fifth week, as companies that lend to the riskiest borrowers continued to report losses.
By Shannon D. Harrington and Jody Shenn
Feb. 23 (Bloomberg) -- The perceived risk of owning low- rated subprime mortgage bonds surged, rising for a fifth week, as companies that lend to the riskiest borrowers continued to report losses.
An index of credit-default swaps on 20 securities rated BBB-, the lowest investment grade, and sold in the second half of 2006 tumbled 7.7 percent to 68.5 today, according to Markit Group Ltd. It's down 30 percent since trading started Jan. 18, meaning an investor would pay more than $1.25 million a year to protect $10 million of bonds against default, up from $389,000.
``Despite some sporadic buying, sentiment remains mostly negative and many believe the index will go lower,'' said Peter DiMartino, an asset-backed securities strategist at RBS Greenwich Capital in Greenwich, Connecticut. The index closed above its lows of the day, ``an important and encouraging development for those awaiting some kind of demonstrated floor,'' he later wrote in a research note.
The index has dropped to record lows for six straight days as some investors used it to bet on the declining fortunes of the housing market and of companies that make loans to the riskiest borrowers rather the performance of the underlying bonds.
The level of delinquencies and defaults on subprime mortgages made last year is the highest ever for such loans at a similar age, according to New York-based Bear Stearns Cos. At least 20 subprime lenders have shut down, scaled back or sold themselves to larger companies since the start of 2006, according to data compiled by Bloomberg.
Moody's Investors Service this week said it may cut the loan servicing ratings of five lenders, including NovaStar Financial Inc., which this week reported a surprise fourth-quarter loss.
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