LONDON, Oct 20 (Reuters) - European corporate credit default swap spreads widened on Wednesday on mounting fears that U.S. banks could be whacked by mammoth costs related to mortgage bonds.
The mood was also blighted by an unexpected Chinese rate hike, which hit Asian stocks as investors fretted that the government may be embarking on a policy tightening cycle to cool the economy and control inflation.
By 0642 GMT, the investment-grade Markit iTraxx Europe index was at 103.25 basis points, according to data from Markit. That is 1.25 basis point wider versus late on Tuesday, according to data from BGC Partners.
The Markit iTraxx Crossover index, made up of 50 mostly "junk"-rated credits, was at 480.25 basis points, 5.25 basis points wider.
U.S. shares fell around 1.5 percent overnight, driven by fears that some banks may be forced to take back billions of dollars in mortgages that should not have been bundled into bonds.
"When the market is in a fragile state and events of this nature start to dominate the headlines it is not likely to be positive for risk assets," said Gary Jenkins, head of fixed income at Evolution Securities.
Estimates of the ultimate potential cost to the banking industry range from nothing to $179 billion, he added.
Bank of America was hit particularly hard, its shares falling more than 4 percent after a group of investors accused the bank of inappropriately bundling some mortgages into more than $47 billion in bonds.
(Reporting by Natalie Harrison; Editing by Michael Shields)