[Original Article Written by Sarah Mulholland]
Yields on bonds backed by everything from skyscraper loans to credit card payments rose relative to benchmarks as concerns that European debt woes would derail an economic recovery roiled credit markets.
The gap, or spread, between top-rated securities tied to property loans and the benchmark swap rate rose 0.25 percentage point to 4.05 percentage points last week, according to JPMorgan Chase & Co. data. A month ago, the bonds paid a difference of 2.8 percentage points. Spreads on top-rated securities linked to consumer debt, such as credit cards and auto loans, have widened as much as 0.2 percentage points since the end of April, according to Wells Fargo Securities.
Credit markets swooned and stocks plunged as European leaders’ response to Greece’s sovereign debt crisis unsettled investors. Bonds that bundle loans to consumers, businesses and property owners have been on a “market rollercoaster,” according to Citigroup Inc. analysts led by Jeffrey Berenbaum.
“Investors could find little solace in the fact that this time around, unlike previous episodes of market meltdowns in 2008-09, securitized markets were not the main source of the general market volatility and anxiety, but rather one of its victims,” the New York-based analysts said in a May 21 report.
Banks and finance companies rely on the asset-backed market to raise cash so they can make new loans. Increased borrowing costs can lead to a ratcheting back of credit to consumers and businesses.
Reviving Issuance
The Federal Reserve started its Term Asset-Backed Securities Loan Facility last year to revive issuance and jumpstart lending after sales dried up amid the credit seizure. The component dedicated to asset-backed bonds ended in March. TALF was extended through June for bonds backed by commercial- property loans.
As the European sovereign debt crisis abates, and there is more clarity about the shape of the financial reform bill passed by the U.S. Senate on May 21, investors will probably abandon “worst case scenarios,” according to JPMorgan analysts led by Alan L. Todd.
The volatility will “continue over the very near term,” the New York-based analysts wrote. “Quantifying and handicapping a turning point is somewhat difficult given the binary nature of the prevailing issues.”
The Standard & Poor’s 500 Index lost 1.3 percent and the Dow Jones Industrial Average declined 1.2 percent to its lowest level since Feb. 10.
Source: www.businessweek.com
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