Credit insurance costs to soar (FT.com)

Global credit derivative markets suffered one of their worst trading days this decade on Monday amid concerns that that some investors are being forced to sell assets to cover losses related to the subprime debacle.

The worsening mood, which pushed prices of credit insurance into record territory, was exacerbated after it emerged that some European institutions have also suffered unexpected losses as a result of the woes in the US subprime mortgage market.

Monday saw further signs of the subprime woes crossing the Atlantic when IKB, a specialised lender to smaller companies, and Commerzbank, the country's second-biggest bank, both warned they would be hit by losses from risky property loans. HSBC announced first-half bad debt charges up by $2.4bn to $6.3bn, mainly because of problems in the US subprime business.

In spite of the heightened risk aversion in credit derivatives markets US stocks rose. The S&P 500 was up 1.2 per cent in late trade, after a sharp tumble on credit market concerns last week. The safe haven of government bonds also gave up some of last week's gains with the yield on the 10-year bond 5 basis points higher at 4.81 per cent.

One key sign of credit sentiment, the so-called "iTraxx" indicator, which measures the cost of buying protection against default for basket of risky European corporate bonds rose more than 60 basis points on Monday to trade above 500bp for the first time. The sharp move means it now costs EU500,000 to insure against the default of EU10m of bonds. Last week it would have cost less than EU400,000.

This marks the largest one-day move ever seen in these markets - more than double the level seen in June. Similar swings occurred in US credit derivatives, where the so-called CDX index of investment grade bonds rose above 100 basis points for the first time.

The deteriorating sentiment had limited impact on the global equity markets, which traded at relatively flat levels, following a sharp tumble last week. However, analysts warned that the financial markets could stay jittery in the coming days, since the credit turmoil could force more financial institutions to offload troubled assets.

"The brutal movement we are witnessing in the markets since last Thursday has a clear element of overshooting, but it is in my view much more dangerous than previous shake-outs, because it has the potential to turn into a full-blown self-fulfilling crisis," warned UniCredit analyst Marco Annunziata, in a note to clients.

There are also mounting - though unconfirmed - market rumours that some investors are now being forced into liquidations because prime brokers are trimming credit lines to groups with heavy exposure to subprime mortgage woes.