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Bond Outlook August 20th

A return to a healthy level of household indebtedness and savings by the middle of next year? Just about conceivable, but the new film, “IOUSA”, needs a big impact.

Bond Outlook [by bridport & cie, August 20th 2008]

We were debating whether there was any good news or any light at the end of the tunnel. The best we could come up with was that house prices in the USA might reach a bottom in mid 2009, thus bringing about an end to the recession. Merrill Lynch see this time horizon as probably enough to reach some key economic targets:

  • household debt servicing to come down from 14% to 10.5% of household income
  • household savings to rise to a level of 8%

Can such a change be achieved within ten months? We have our doubts. These are hard targets in light of the refinancing needs of Fannie Mae and Freddie Mac and of many banks. They are all paying increased borrowing costs, which can only increase the cost of mortgages and decrease the availability of credit. Not a recipe for turning the housing problem around from the current 17 year low in building activity.

If that were not enough, holders of prime mortgages but under a system called “ARM” (adjustable rate mortgages) are due to see principal and interest payments move up substantially in the coming months.

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