Credit markets are seizing up on concern more financial institutions will fail after Lehman Brothers Holdings Inc. filed for bankruptcy and American International Group Inc. was downgraded.
Corporate borrowing costs soared to a record in the U.S. and climbed to an all-time high in Europe, Merrill Lynch & Co. indexes show. The cost of borrowing overnight in dollars more than doubled to the highest since 2001, according to the British Bankers’ Association. Bonds of financial companies plunged.
The London interbank offered rate for overnight loans in dollars, or Libor, rose 333 basis points to 6.44 percent Tuesday, the largest increase in its history. The cost of protecting corporate bonds in North America from default advanced to a record.
“It’s been absolutely shocking,” said Phil Roantree, a London-based investment manager at New Star Asset Management Group Plc. “There has been no liquidity in the market and prices are being hammered as people try and sell pretty much everything that isn’t a government note, especially financials.”
Banks tightened lending as AIG was downgraded by Moody’s Investors Service and Standard & Poor’s, adding to evidence that the fallout from the collapse of the U.S. mortgage market is spreading. The surge in funding costs came less than a day after Lehman filed for bankruptcy, the biggest in history, and Merrill sold itself to Bank of America Corp.
The extra yield investors demand to hold U.S. investment-grade bonds advanced 36 basis points to 380, the biggest one-day increase, Merrill indexes based on Monday’s close show.
The spread on European financial company debt over government bonds climbed 26 basis points to 268, the highest level since Merrill started compiling the daily data in 1999.
“The market is so volatile it’s impossible to predict what will happen from one minute to the next,” said Alex Moss, who oversees the equivalent of about $1.55 billion as head of high-yield bonds and leveraged loans at Insight Investment Management in London.
