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Bond Outlook April 25th

We keep insisting on sub-prime problems still to come. USD 75 billion may be the loss to date for buyers of opaque and illiquid US mortgage-backed bonds.

Bond Outlook [by bridport & cie, April 25th 2007]

Our bias against structured and securitised bond products is based on their two major lacunae: liquidity and transparency. Both are hurting bond investors seduced by the extra yield offered by mortgage-backed bonds in the USA, especially those “supported” by sub-prime lending. The more sophisticated buyers have been boasting that they have taken only the AAA portion of the CDOs, but someone must have been buying the low-credit portion!


At last some estimates of the size of the problem have been published, thanks to Pacific Investment Management Co.:


  • There are more than USD 6 trillion of mortgage-backed bonds outstanding (about half as much again as the US Government debt)
  • Some USD 450 billion of these are linked to sub-prime
  • The prices of these have already dropped by a total of USD 75 billion to date.


Some of the losses are being borne by banks such as HSBC, which was the first to announce its losses.

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