Bear sale rattles subprime, commercial loan indexes

By Al Yoon and Nancy Leinfuss

NEW YORK (Reuters) - Indexes of bonds backed by commercial and risky residential mortgages slumped on Monday amid concern the funding freeze that led to the fire-sale of investment bank Bear Stearns may deepen.

The commercial and subprime mortgage gauges fell after the Bear Stearns BSC.N sale and an emergency Federal Reserve liquidity provision for investment banks over the weekend. The need for backup financing signaled the credit crunch that has already seized markets for mortgage-related debt has worsened.

"Right now people are shocked," said Mike Kagawa, a portfolio manager at Payden & Rygel in Los Angeles, California. "I don't think anyone really knows what to do. I think people are thinking things are going to get more dire."

Rising delinquencies in subprime residential mortgages sparked the credit crisis that last summer claimed two hedge funds managed by Bear Stearns, the second-biggest underwriter of mortgage-backed securities. Expectations that U.S. house prices will fall through 2008 and force more foreclosures have led investors to pull funding for loans and securities purchased by dealers and hedge funds on borrowed money.

Following the subprime meltdown, investors seeing inflated commercial property values have used the CMBX to increase bets against that sector.

Parts of the ABX indexes of subprime bonds may trade at record low levels on Monday, based on bid and offer quotes. Some ABX indexes have already lost 75 percent of their value since mid-September, and are closing in on zero.

The highest-rated tier of the ABX 07-1 index fell more than one point to 55 on Monday from 56.10 at Friday's close, while the "AA" slice dipped to 21 from 22.19, traders said. The "BBB-" portion was bid at 8 and offered at 10, leaving that index vulnerable to drop below its record low of last week at 8.78, dealer quotes show.

The "BBB-" portion of the CMBX-4 index of bonds backed by office buildings, hotels and shopping centers -- which dealers quote based on yield spread instead of price -- widened about 20 basis points to a range between 2,190 and 2,365, the dealer said. The index closed Friday at a record 2,280.

Bear Stearns is being sold for just $236 million in a hastily arranged deal backed by the Fed. The central bank also unveiled a new lending facility at the discount rate for Wall Street primary dealers.

The Bear Stearns sale also led to turmoil in equity markets where global financial stocks were pummeled.

The Fed's move "increased the sense of just how bad things are," Merrill Lynch & Co. economist David Rosenberg said in a research note. "This heightens the risks as uncertainty is rife, and this breeds further risk-aversion."