Markets are selling over very hard as we break key support levels.
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WSJ reports rampant speculation on bank nationalization gained momentum in the bond market, sending the cost of protecting senior bank debt to record levels as sinking shares of financial institutions heightened concerns about their viability.
While Citigroup (C) and Bank of America (BAC) featured prominently in the speculation, investors said the concerns were more broadly based about the financial system as a whole.
Uncertainty over what nationalization would look like if the government decided to intervene in the still-troubled financial sector drove the selling of stocks and bonds and buying of credit protection.
The cost of protecting senior debt of Citi, Bank of America and Wells Fargo (WFC) rose to record levels. Meanwhile, bank hybrid debt has plummeted this week, as investors worry these securities, which blend features of both stocks and bonds, could be wiped out if there's a government intervention.
Bank of America and Citigroup hybrids have dropped more than 10 cents on the dollar to around 20 cents on the dollar.
Risk premiums on 10-year senior bank bonds across the board have widened about 60 basis points for the past two weeks, according to a bond investor.
A bond trader said bank senior bonds were trading between 20 to 50 basis points wider on the week, but other market participants noted that these bonds have been thinly traded.
Prepare yourself for the "New Economy"