Bond risk soars to record as markets return to crisis mode

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Nov 20: The cost of protecting corporate bonds from default surged to records around the world as the prospect of US automakers filing for bankruptcy protection fueled concern of more bank losses and a deeper recession.

"Markets are back in crisis mode," said Agnes Kitzmueller, a Munich-based credit strategist at UniCredit SpA, Italy's biggest bank. "There is fear in the market."

General Motors Corp., Ford Motor Co and Chrysler LLC executives left Washington empty handed on Wednesday after two days of pleading with lawmakers for a $25 billion bailout. Credit markets have 'significant' liabilities to the automakers raising the prospect of 'continued writedowns,' BNP Paribas SA analysts told investors on Thursday.

Credit-default swaps on the Markit iTraxx Crossover Index of 50 European companies with mostly high-risk, high-yield credit ratings increased 35 basis points to a record 925, according to JPMorgan Chase & Co prices at 10:09 a.m. in London. In Tokyo, the benchmark Markit iTraxx Japan index of investment-grade companies jumped 35 basis points to an all-time high of 330, Morgan Stanley prices show.

Stocks slumped worldwide and US index futures fell ahead of a Conference Board report of leading economic indicators that probably fell for the third time in four months, economists said. UK retail sales slumped for a second month in October as rising unemployment and the financial crisis dissuaded shoppers from spending. Investors also face a 'poisonous cocktail' of concerns over the collapse in value of mortgage-related assets in the US, Jeroen van den Broek, the Amsterdam-based head of credit strategy at ING Groep NV, wrote in a report today. Treasury Secretary Henry Paulson's decision to abandon plans to buy toxic mortgage assets has driven the price of the securities to record lows, triggering concern of more losses and writedowns at banks.

"Anything's possible in this market," said Mark Bayley, a director of credit at ABN Amro Holding NV in Sydney. "You're seeing sellers of risk and very few buyers. The sellers are becoming more stressed and willing to accept very wide spread levels for corporate bonds."