Europeans Suspend Trading of Covered Bonds

Continued illiquidity in the covered bond markets in Europe has led to the suspension of trading. Once again risk aversion has caused markets to become illiquid, which in turn leads to concerns about setting values in markets that are stuck. Ultimately, Institutions are worried about setting values for securities in markets that are illiquid because of the required write-downs it could cause for their firms. Text in bold is my emphasis. From CNN.Money:

Growing unease among investors has driven banks in Europe to temporarily suspend trading of covered bonds, the latest sign of the deepening problems in the mortgage debt market.

Covered bonds are debt securities that often are backed by a pool of home loans. They're one of the many funding markets European banks have looked to recently to raise money to grant mortgages.

Compared to other mortgage-backed securities, covered bonds are generally considered safe, since investors usually have a preferential claim when borrowers default.

But growing risk aversion among investors led the European Covered Bond Council, which represents banks and other participants in this market, to recommend Wednesday that trading be suspended until next week.

"In light of the current market situation and in order to avoid undue over-acceleration in the widening of spreads, the [committee representing securities firms and borrowers] recommends that inter-bank marketmaking be suspended," the group said in a statement.

The council recommended that trading be suspended until Nov. 26, when the committee of market participants next meets.

Investors have shunned debt linked to home loans since problems in the subprime market escalated in the summer. Everything from short-term commercial paper to pools of bonds known as collateralized debt obligations have been hard hit.