Sub-prime indexes fall despite Lehman push

It’s time to pick up the pieces after the four-month rout in the riskiest sub-prime mortgage-backed bonds, a big Wall Street investment bank told clients over the weekend.

But that failed to stop the decline in securities indexes tied to the high-risk mortgages Monday. Shares of many sub-prime lenders also continued to fall.

Lehman Bros. Holdings Inc. said clients that had bet on rising sub-prime loan defaults and plunging prices for bonds backed by the loans should book their profit. Factors behind the sector’s troubles are largely priced into the market, Lehman analysts said in a research note.

Wall Street has been closely watching the so-called ABX indexes, which indicate prices of credit default swaps on mortgage bonds. Credit default swaps allow investors to hedge against losses on loans -- or to bet that defaults will rise.

One ABX index on BBB-rated sub-prime bonds issued last year dived from a value of 100 in August to 69.39 as of Friday.

Despite Lehman’s recommendation Monday, the index fell further, to 68.97. Still, that was a modest decline compared with the free fall of recent weeks.

Sub-prime loans are mortgages made to people with weak credit or limited financial wherewithal. Defaults on those loans have jumped in recent months.

Some analysts continue to advise investors to be wary of bonds backed by the loans.

“We are still in the early stages of the sub-prime mortgage market meltdown, and there is no good news on the horizon,” said Chris Flanagan, a mortgage bond specialist at JPMorgan Chase & Co., in a note to clients.

Sub-prime lenders’ stocks have been hammered in recent weeks and fell further Monday.

Countrywide Financial fell 61 cents to $38.72, New Century Financial lost 28 cents to $15.24 and NovaStar Financial dropped 52 cents to $7.96.