Bond Outlook April 11th

This Weekly happens to be written in the USA, where on the television, economists can be seen gravely explaining how mortgage holders, especially those who took out sub-prime mortgages with low starter rates, cannot pay the higher rate of interest and reimbursement now switching in, and cannot raise additional loans because their houses are not going up in value. The economists are followed by lawmakers from Washington determined to prevent frivolous lending, which they call the “provision of liquidity without responsibility”. There will then appear a commercial for “no documentation” home loans, suggesting that the sub-prime market might be dead, but it will not lie down!

We have said before, and we say it again, the sub-prime problems are neither over nor contained. This week it happens to be “American Home Mortgage Investment” which is in trouble, along with DR Horton, the largest US homebuilder by sales, which is especially affected by sub-prime as it focuses on “affordable housing”. However, the economic effect is not “just” one of credit defaults or building-related activity. We have always expected the consequence of the housing bubble deflation to be a reduction in US household spending when households return to saving instead of maintaining spending by borrowing.