Bankruptcy fears roil markets amid margin calls
NEW YORK (Reuters) - Global credit markets saw more volatility on Thursday, as hedge funds and private equity groups dealt with margin calls and mortgage lenders struggled their financing.
Prices fell in markets for mortgage backed securities and other asset backed debt. Credit default swap protection costs jumped for corporate debt, swap spreads widened to record levels.
The dramatic repricing of risk led mortgage and corporate debt issued by U.S. mortgage financiers Fannie Mae (FNM.N) and Freddie Mac (FRE.N) in particular to extended steep declines, hitting some levels not seen in more than 20 years.
Amid fresh signs that the mess in the U.S. mortgage market and the resulting credit crunch are still getting worse, Wall Street's benchmark Standard & Poor's 500 stock index tumbled 2.2 percent to its lowest closing level in 18 months.
"The big story in the market is the forced liquidation of mortgage securities, which is just driving everything," said Carl Lantz, U.S. interest rate strategist at Credit Suisse in New York. "It is driving a flight-to-quality bid."
U.S. economic data showed no sign of improvement in the housing market at the center of the credit market's disquiet.
U.S. home foreclosures and the share of borrowers who face losing their homes rose to records in the fourth quarter and those figures will worsen, the Mortgage Bankers Association said.
JUMBO PROBLEM
Attention centered on Thornburg Mortgage Inc TMA.N on worries the "jumbo" mortgage lender might go bankrupt after its failure to meet a margin call triggered defaults under other lending agreements.
Also making headlines, a Dutch-listed affiliate of private equity firm Carlyle Group CYL.UL has not been able to meet some margin calls and has received a notice of default.
Carlyle Capital Corporation (CCC) CARC.AS said it received margin calls totaling more than $37 million from seven financing parties on Wednesday and was unable to meet the demands for extra collateral to cover its market positions for four of them.
Selling of securities by hedge funds and other money managers that borrowed money to enhance returns in recent years has been a big reason for credit market troubles this week.
Yields on Fannie Mae-guaranteed mortgage-backed securities paying 5.5 percent interest jumped 0.20 percentage point to 2.33 percentage points above Treasuries, the highest in more than two decades, according to Reuters and traders' data.
Fannie Mae and Freddie Mac, chartered by the U.S. Congress to raise money for homeownership, provide guarantees on mortgage-backed securities sold to investors.
The companies fund a combined $1.4 trillion in investments in mortgages and mortgage securities in the separate agency debt market.
The U.S. corporate bond market weakened amid the turmoil. The U.S. investment grade credit derivative index widened to record of around 182.5 basis points, from 165 basis points at Wednesday's close, according to Markit Intraday.
In another sign of credit anxiety, the spread on U.S. two-year interest rate swaps posted a series of records, as traders flocked into Treasuries and other safe-haven assets.
Swap spreads are considered gauges of risk aversion among investors. They have expanded in recent days on credit worries stemming from continuing problems in the financial sector.
