Bond Risk Soars as Bear Stearns Blocks Exit From Third Fund
By Hamish Risk
Aug. 1 (Bloomberg) -- The risk of owning corporate bonds soared after Bear Stearns Cos. blocked investors withdrawing money from a hedge fund as losses in subprime mortgage securities spill into other parts of the credit market.
Credit-default swaps on 10 million euros ($13.8 million) of debt included in the iTraxx Crossover Series 7 Index of 50 European companies jumped 59,000 euros to 459,000 euros, according to JPMorgan Chase & Co. The index traded as low as 383,000 euros yesterday. An increase indicates worsening perceptions of credit quality.
Bear Stearns, which triggered a credit market selloff in June because of the near-collapse of two hedge funds, yesterday halted withdrawals from its Asset-Backed Securities Fund that has about $900 million invested. Australia's Macquarie Bank Ltd. said yesterday that investors in two of its hedge funds may lose 25 percent of their money and Sowood Capital Management LP said this week it lost $1.5 billion in July after declines in corporate debt markets.
``There are ongoing rumors that some other funds and banks are in trouble,'' Jochen Felsenheimer, head of credit strategy at Unicredit SpA in Munich, said in a note to investors today. ``Subprimemania is not over yet, but the really negative news is that it now fully spilled over into the financial system.''
The Bear Stearns asset-backed fund had less than 0.5 percent of its assets in securities linked to subprime loans, spokesman Russell Sherman said in a telephone interview yesterday. Even so, investors concerned about losses sought to withdraw their money, he said.
Funds Closed
Sydney-based Macquarie, Australia's largest securities firm, said declining asset prices in the U.S. subprime mortgage market led to losses at its funds. Sowood, based in Boston, sold most of its assets to Citadel Investment Group LLC and said it will unwind two funds. Oddo & Cie., a French stockbroker and money manager, cited problems in the U.S. asset-backed securities market in its plans to close funds totaling some $1.4 billion.
The losses sparked a credit market selloff in Asia. Credit- default swaps on 1 billion yen ($8.4 million) of debt included in the iTraxx Japan Series 7 Index of 50 investment-grade companies rose to 4.3 million yen in Tokyo from 3.6 million yen yesterday, according to UBS AG prices.
Investors use credit-default swaps to speculate on the ability of companies to repay debt.
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