13 June 2007

Subprime-Loan Risk Reaches Record, Derivatives Show

Bloomberg.com: Bonds: "June 12 (Bloomberg) -- The perceived risk of owning low- rated subprime-mortgage bonds created in the second half of 2006 rose to a record as loan delinquencies and mortgage rates climb, according to an index of credit derivatives.

An index of credit-default swaps linked to 20 bonds rated BBB- fell 2.9 percent to 62.12, according to Markit Group Ltd. The ABX-HE-BBB- 07-1 index's previous low of 62.25 came on Feb. 27. An ABX index linked to 20 similar securities from the first half of 2006 remains about 10 percent off a low hit in February.

Improved investor sentiment in May and early June about subprime-mortgage bonds and related collateralized debt obligations may have represented an ``eye of the storm,'' Louis Lucido, group managing director at Los Angeles-based money manager TCW Group Inc., said at a conference in New York last week sponsored by industry group American Securitization Forum.

Yields on 10-year Treasury notes, which mortgage rates generally track, have increased about 0.37 percentage points this month to 5.26 percent, amid bond buyer speculation that concerns about inflation will keep the Federal Reserve from lowering its target rate to boost a slumping housing market.

Higher mortgage rates lessen the chances that subprime borrowers will be able to refinance into new loans when their initial ``teaser'' rates end after two"

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