Derivs - Credit

Credit spreads on U.K. mortgage lender HBOS took a hit in the wake of the Lehman Brothers collapse this week.

The International Swaps and Derivatives Association has determined that stripped pieces of Fannie Mae and Freddie Mac bonds cannot be used as deliverable obligations under standard credit default swap contracts.

Lehman Brothers’ bankruptcy and growing concerns about the solvency of American International Group have pushed spreads wider on Europe’s iTraxx indices.

Mizuho Corporate Bank’s recent JPY136 billion collateralized loan obligation offering has had a lukewarm reaction from investment banks.

Determining the successor to credit default swap contracts referencing Lehman Brothers could have turned into a complicated process had the U.S. firm gone ahead with the ‘good bank’ and ‘bad bank’ survival plan floated over the last few days.

Concern the troubles that felled Lehman Brothers are not contained have caused credit default swaps on other prominent Street firms Goldman Sachs and Morgan Stanley to widen substantially.

Dealers are watching bid/ask quotes on off-the-run series of the iTraxx indices in Europe, which until recently they had largely ignored.

Premiums for five-year credit default swaps on Lehman Brothers had widened to 650 basis points earlier this morning, after opening the day at 500.

European institutional and high net worth investors are reported to be showing interest in unlevered loan funds, which deploy loan-only credit default swaps.

Spreads on Europe’s iTraxx indices pushed out this week on the back of news from the U.S. and a wave of new issues that saw market participants buying protection.

Credit defaults swaps on Aiful, flew out to 940 basis points on Monday on five-year spreads, widening 105bps in the week ending Aug. 8, according to Markit data.

• $3.9bn Q3 loss racked up after Alt-A hedging failure • $30bn plan to spin-off REI comes too late • Fannie and Freddie bailout euphoria wiped out Lehman Brothers was front, back and centre of events in the credit market this week and at the close in New York yesterday rumours gathered strength that Bank of America is poised to rescue the ailing investment bank.