Stocks skid as mortgage crisis takes toll on bonds
Financial markets took another hit Thursday as the mortgage crisis continued to bleed into other types of securities, reflecting skittish investors’ general pullback from risk-taking.
The stock market’s three-day advance halted, and some funds that own tax-free municipal bonds tumbled in value for a second day as investors balked at buying certain types of muni securities.
In the bond market, “You’ve kind of worn people down,” said Howard Simons, a strategist at Bianco Research in Chicago. “Each time we get the sense that we have a handle on everything going on in the credit crisis, something else crawls out of the woodwork.”
The Dow Jones industrial average slid 175.26 points, or 1.4%, to 12,376.98, taking back about half of its advance in the previous three sessions.
Investors were troubled as Federal Reserve Chairman Ben S. Bernanke and Treasury Secretary Henry M. Paulson Jr. sounded cautious about the economy on Capitol Hill.
What’s more, Swiss banking giant UBS reported an $11.3-billion fourth-quarter loss, mainly because of a $13.7-billion write-down on U.S. mortgage bonds. That included a $2-billion write-down on bonds backed by so-called alt-A loans, which had been considered to be much less risky than sub-prime mortgages.
UBS shares slumped $3.05, or 8.2%, to $33.94, and fear of spreading losses in the mortgage sector hammered other financial issues as well.
Bank of America, which has agreed to buy mortgage giant Countrywide Financial, fell $1.09 to $42.24. Fannie Mae, which invests in mortgage loans, slid $1.13 to $30.34. Downey Financial dropped $1.12 to $28.22.
In the bond market, the focus Thursday was less on mortgage issues and more on municipal issues.
Demand for some types of muni securities has fallen sharply in recent weeks amid concerns about the financial health of insurance companies that guarantee the bonds. Because the insurers also have guaranteed sub-prime mortgage securities, investors are concerned that sub-prime-related losses could wipe out the insurers’ capital.
New York insurance regulators have been trying to work out a plan with major banks to pump capital into the insurance firms, and Gov. Eliot Spitzer said Thursday that a deal could happen within days.
The urgency of the situation was highlighted as credit-rating firm Moody’s Investors Service slashed its AAA rating on the bond insurance unit of FGIC Corp., cutting the firm’s grade six notches, to A3.
That caused more problems in the segment of the bond market known as auction-rate securities. Yields on those bonds are reset in regular weekly or monthly auctions. As investors have pulled back from the securities, some auctions have failed, forcing issuers -- including some municipalities -- to pay double-digit penalty yields at the resets.
“These are high-quality instruments,” Simons said. “That’s what’s got a lot of people scared” by investors’ reluctance to step up.
Rising market yields on bonds depress the prices of older securities. That has translated into declines in the share prices of some muni-bond mutual funds this week.
So-called closed-end funds have been hit hard, because some of them borrow using auction-rate securities to invest in other bonds.
Shares of the Pioneer Municipal High Income Trust slumped 44 cents to $13.89 on Thursday, a 3.1% decline. They had fallen 3.2% on Wednesday.
Nuveen California Dividend Advantage Muni fund slid 63 cents, or 4.4%, to $13.67 after falling 2.8% on Wednesday.
Yields also rose on long-term U.S. Treasury securities, although analysts said that probably stemmed from data in recent days suggesting the economy might be holding up better than expected.
The 10-year T-note jumped to a five-week high of 3.8% from 3.73% on Wednesday.
Among the day’s market highlights:
The stock market’s sell-off was broad-based. The Standard & Poor’s 500 index fell 18.35 points, or 1.3%, to 1,348.86. The Nasdaq composite dropped 41.39 points, or 1.7%, to 2,332.54.
Beaten-down shares of some bond insurers rose on hopes for a New York-brokered capital infusion. MBIA gained 98 cents to $12.62; Ambac Financial jumped $1.16 to $10.53.
Near-term crude oil futures in New York jumped $2.19 to $95.46 a barrel as signs of strength in Asian economies underpinned expectations that demand would remain strong.
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walter.hamilton@latimes.com
