Credit fears subdued by BoA investment in Countrywide

Dealers believe the $2 billion investment by Bank of America in troubled California-based mortgage lender Countrywide Financial helped ease credit worries during morning trading in Europe.

“That’s the main reason why credit spreads are significantly tighter today,” said Marcus Schuler, London-based head of integrated credit marketing at Deutsche Bank.

By noon, spreads on the five-year iTraxx Crossover Index of 50 sub-investment grade credit default swaps had narrowed to 309 basis points, down from 326 at close the previous day.

On August 22, Bank of America bought $2 billion of non-voting preferred stock in Countrywide, which has been hit hard by problems in the US subprime mortgage sector. The securities carry an annual yield of 7.25% and can be converted into common stock in the company for $18 a share. Bank of America said it hoped the move would be “a step toward a return to more normal liquidity in the mortgage markets”.

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Japanese banks suffering from subprime crisis