Bond Risk Rises on Concern Over Bear Stearns Hedge-Fund Losses

By Hamish Risk

The perceived risk of owning corporate bonds soared worldwide on concern over losses at hedge funds run by Bear Stearns Cos.

Credit-default swaps based on 10 million euros ($13 million) of debt included in the iTraxx Crossover Series 7 Index of 50 European companies jumped as much as 16,000 euros to 216,000 euros, the biggest one-day rise in three months, according to Deutsche Bank AG. The CDX Crossover index in New York surged as much as $10,000 to a nine-month high of $178,000.

Bear Stearns in New York is trying to salvage two hedge funds specializing in mortgage bonds after they lost as much as 20 percent because of rising delinquencies this year on subprime loans made to homebuyers with poor credit ratings. Merrill Lynch & Co. yesterday threatened to seize and sell $800 million of bonds held as collateral for loans to the funds.

``While markets ignored the subprime-mania time bomb since the market shake out in March, it seems to be a longer lasting phenomenon,'' said Jochen Felsenheimer, head of credit derivatives strategy at UniCredit Group in Munich. ``In this highly leveraged environment, when the playing field is dominated with hedge funds, the risk is you could get a domino effect. There's the potential for more negative news.''

Credit-default swaps are used to bet on a company's ability to repay debt and an increase in the cost indicates worsening perceptions of credit quality.

The European iTraxx index was at 213,000 euros at 1:10 p.m. in London, according to JPMorgan Chase & Co. The CDX index was at $172,500.

Loans Index

The LCDX index of credit-default swaps on high-yield, high- risk loans fell for a ninth day, dropping 1.19 to 98.08, signaling a deterioration in the perception of the creditworthiness of the 100 U.S. borrowers included in the index. The LCDX is down 2.55 since May 22, when 13 Wall Street banks began offering the five-year contracts in the privately negotiated over-the-counter market.

As home-loan defaults rise, bondholders stand to lose as much as $75 billion of subprime-mortgage securities, according to an April estimate from Pacific Investment Management Co., manager of the world's largest bond fund. Investors in all mortgage bonds will probably take about $100 billion in losses, according to a March report from Citigroup Inc. bond analysts.

To contact the reporters on this story: Hamish Risk in London at hrisk@bloomberg.net
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