Investors in European and US credit markets accelerated their flight from risk on Wednesday as the effects from the US mortgage markets continued to spill over into other asset classes, The Financial Times reports.
The change in sentiment, which triggered moves in credit derivatives markets, suggested that recent problems in the subprime mortgage sector could be spreading to other corners of the financial world.
Moody’s also said it could downgrade $5 billion of complex collateralised debt obligations backed by mortgage securities on Wednesday, affecting 184 mostly low-rated securities. The move followed ratings moves on billions of dollars of mortgage-backed bonds by Moody’s and Standard & Poor’s on Tuesday.
“Risk aversion is now the most-used word we hear,” says Gerard Chaupin, European credit analyst at UBS. He says rating agencies’ downgrades of instruments linked to subprime securities “may have been the straw that broke the camel’s back”.
“Volatility is going to be here to stay for a number of weeks.” says Robert McAdie, global head of credit strategy at Barclays Capital. However, Wednesday’s rally in US stocks prompted some investors to conclude that the turmoil in the credit markets was unlikely to spread much further.
JPMorgan observed that swings in derivatives prices were so extreme they implied “scenarios in which the core of the global liquidity system suffers a serious assault”. But it stresses “the meltdown in the credit indices seem completely at odds” with trends in the real economy, implying it should be reversed.