“The crisis will continue to loom large”

From the Wall Street Journal:

Subprime Crisis Is Likely To Continue Its Sting
By DEBORAH LYNN BLUMBERG and ANUSHA SHRIVASTAVA
June 25, 2007; Page C4

Bond investors will keep one eye on the Federal Reserve and the other on the mortgage market this week, as they wait for the next installment of the drama surrounding two troubled Bear Stearns Cos. hedge funds that bet heavily on the subprime-mortgage market.

Though Bear stepped in to bail out one hedge fund with a loan of as much as $3.2 billion and pledged to reduce leverage in the other, market participants reckon the subprime-mortgage woes will continue to rattle capital markets.

“The crisis will continue to loom large,” said T.J. Marta, fixed-income strategist at RBC Capital Markets in New York. While the situation seems to be under control for now, “that could turn on a dime.”

Michael Cheah, portfolio manager at AIG SunAmerica Asset Management in Jersey City, N.J., said the Bear funds were most probably not alone in the bets they made on the subprime-mortgage market. “A lot of people have got that trade on,” he said. “I would be shocked if they were the only one…and the story ends here. It’s not over.”

A catalyst for another round of jitters, which Friday sent Treasury prices higher as investors sought a safe harbor, could be mortgage-loan performance reports due today that investors will parse for signs that the situation among borrowers with shaky credit has worsened.

Late Friday the riskiest, triple-B-minus, tranche of the benchmark derivative index based on subprime mortgages hit a new low of 58 cents on the dollar, according to Alex Pritchartt, a trader at UBS. The index, designed to allow investors to take a broad position on the housing market’s most vulnerable segment, has been closely watched by market participants.

The latest version of the ABX, which is renewed every six months, references loans originated in the second half of 2006, a year noteworthy for its loose lending standards. Mr. Pritchartt said trading volume picked up Friday afternoon as market participants braced for the subprime loan performance reports published today.