Wall Street Haunted by ‘08 Loses Risk Appetite: Credit Markets

Aug. 29 (Bloomberg) -- Wall Street traders are demanding the biggest premiums to buy and sell credit in almost two years as they seek protections from market swings driven by Europe’s debt crisis and a slowing global economy.

A measure of the cost of trading credit-default swaps has tripled this month as prices gyrate the most in 13 months, according to data compiled by Bloomberg and CMA in London. Amid the volatility, the biggest bond dealers cut their holdings of corporate securities to $73.1 billion as of Aug. 17, the least since July 2009, Federal Reserve data show.

The surge underscores the fragility of credit markets three years after the collapse of Lehman Brothers Holdings Inc. triggered the biggest corporate bond losses in at least 35 years. With junk-rated securities poised to lose the most this month since November 2008, banks and investors are bracing for broader declines on concern Europe’s fiscal imbalances will infect the banking system at a time when the economy may not be strong enough to withstand such headwinds.

“The specter of 2008 still looms large,” said Tom Farina, a managing director at Deutsche Insurance Asset Management, which oversees $200 billion. “People understand that tail risk is still quite large in comparison to the way we used to think about it,” he said, referring to extreme market moves that fall outside probable outcomes forecast by Wall Street.

Bid-Ask Spread

The difference between where dealers will buy and sell the 15 most-traded credit-default swaps on U.S. investment-grade companies has widened to 14 basis points from 4.6 basis points at the start of August, according to market prices compiled by CMA. That’s equivalent to $14,000 on a $10 million contract and up from $4,600. The so-called bid-ask spread has increased to 5.4 percent of the annual cost of the contracts, the most since December 2009 and up from 3 percent on Aug. 1.

“The dealer community is not putting risk on,” said Jason Rosiak, the head of portfolio management at Newport Beach, California-based Pacific Asset Management, an affiliate of Pacific Life Insurance Co. “They’re not cushioning the blow as they once upon a time were, and this leads to more volatility.”