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Bond Outlook July 4th

Sub-prime and CDO problems are just not going away, despite attempts of banks, rating agencies and regulatory authorities to pretend otherwise. Odd that the UK’s FSA should speak up, though.

Bond Outlook [by bridport & cie, July 4th 2007]

Our question last week bears repeating: “Are the waves caused by the failures of the Bear Sterns hedge funds responsible for merely a short-term set back in stock markets and low-credit bonds, or do they reflect a long-term change in sentiment?” A twofold answer is emerging. The bond market is becoming more risk-averse, while stock markets have again treated the failures as a mere temporary set-back before again moving forward. Fortunately our duty concerns only the former!


More data have appeared this week to support our view that the CDO/sub-prime problems have much more damage to inflict. John Mauldin has again found fascinating data (this time from Bloomberg) suggesting losses in the order of USD 250 billion. This leads us to suspect that there is a kind of conspiracy going on to hide the facts, not a conclave in smoke-filled rooms (which no longer exist, anyway!) but a widespread refusal to face the CDO problem head on. First, it is obvious that the investment banks are doing everything possible to avoid establishing market prices for CDOs.

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