Collateralised debt obligations are grinding to a halt, imperiling $8.6 billion in annual underwriting fees, Bloomberg reports.
Sales of the securities — used to pool bonds, loans and their derivatives into new debt — dwindled to $9.1 billion in the U.S. this month from $42 billion in all of June, analysts at New York-based JPMorgan Chase & Co. said in a report yesterday. The market, which was “virtually shut” earlier this month, is showing “signs of life,” the bank said.
Investors are shunning CDOs after the near-collapse of two hedge funds run by Bear Stearns Cos. that owned the securities. Standard & Poor’s downgraded bonds from 75 CDOs as mortgages to people with poor credit defaulted at record rates. Concern about losses on home loans are rattling investors across the credit spectrum.
“People are trying to find value and the right price and right now nobody knows what it is. Pretty much everyone is in the dark,” says Alexander Baskov, a fund manager who helps oversee $25 billion of high-yield debt for Pictet Asset Management SA in Geneva.
Investors are demanding yields 15 percentage points higher than benchmark rates to compensate for the risk of losses on some of the lower investment-grade rated parts of CDOs, up from 5.5 percentage points in February, according to data compiled by JPMorgan.