“In the middle of June the credit spreads tightened up and there was a lot of talk, certainly about the names in the counterparty risk index, that the worst was over,” says Mr. Klein. “In the last week people have really backtracked on that. The sentiment now is that there is no light at the end of the tunnel.”

Why the despair? Part of it has to do with the slow, steady wave of rising mortgage delinquencies, and the erosion of the value of assets backed by those mortgages. In addition, the loss by bond insurers MBIA Inc. and Ambac Financial Group Inc. of their key triple-A credit ratings has forced banks and brokerages to revalue the assets those firms backed.

“That’s triggering some forced selling and delevering,” says Mirko Mikelic, portfolio manager for Fifth Third Asset Management in Grand Rapids, Mich. “People are getting rid of structured product and corporate (bonds) across the board, and that continues unabated…dealers don’t want to hold onto any inventory.”

Mr. Klein says credit-default swap spreads also tend to widen when earnings approach, as investors brace for the latest spate of write-downs from major banking firms. Several Wall Street analysts expect more than $4 billion in write-downs from Merrill Lynch & Co., while some analysts estimate Citigroup Inc. could write down as much as $9 billion in assets.

“Our expectation was that write-downs would be done by the second quarter but it looks like it’s going to be another quarter or two,” says Mr. Mikelic.