Bond yields down on more worries about easy money, subprime mortgages, junk bonds and hedge funds.
Oil and copper up, gold still going nowhere, wheat and corn prices down sharply (see separate story).
And once again, amid all the volatility in debt and share markets, few investors are choosing commodities and especially gold, as a hedge or a store of value.New York gold rose 50c on Friday to $US650.90, hardly a ringing endorsement from investors looking to protect value.Solid, boring US Government treasury bonds, mainly two and ten year securities, have become the safe haven of choice.
Two-year US Treasury notes rose the most since March on Friday after a report showed the key inflation measure watched by the US Federal Reserve had slowed.
Not helping sentiment was the news of the two bombs being found in London; the later attempt to bomb Glasgow airport won't help sentiment this week.
Yields on two-year US Government fell to 4.88 per cent on Friday, the lowest since March 21.
The more closely watched 10-year bond yield is now down from the five-year high of 5.327 per cent on June 13 to5.04 per cent on Friday afternoon. They were 5.08 per cent the previous Friday close.
This drop has nothing to do with easy money or liquidity or a reversal of the change in sentiment about easy credit: it is a result of investors large and small seeking the haven of the most secure and liquid investment in world finance: the US Government bond market.
Deals were still being pulled, delayed or not revealed on Friday because of the uncertainty in credit markets. Multiple official investigations are underway.
The fall in US Government bonds has added to the widening spread between US Treasury securities and junk bonds: by some measures it is now close to 3 per cent.
Friday, being the last day of the June quarter in the US, means that fund managers have to mark to market trillions of dollars of investments, listed and unlisted.
The troubled CDOs (Collaterallised Debt Obligations) and their imitators are all unlisted. They are valued on the basis of quotes from investment banks and brokers who trade in them. After last week's ructions, there is growing pressure for this pricing to be made transparent.
Bear Stearns is liquidating two hedge funds that were saved from collapse before June 30; a London based hedge fund with $US908 billion invested in the CDO and allied securities markets, is liquidating.
Another London hedge fund has reported losses. The fear is more will emerge in coming weeks on the basis of the June 30 valuations.
Even though the CDOs market is illiquid and not well regulated, the SEC should order all investors holding them to produce a set of accounts at June 30 showing the probable market value and what the values were at March 31 and December 31.
Some analysts and commentators are claiming that the US banking and investment industry could suffer total losses from subprime mortgages and CDOs and other similar forms of security of $US100 billion or more.
The US banking industry has around $US850 billion in capital, according to figures in the Financial Times newspaper. Losses of that size are a major 'ouch'.
"Estimates vary, but assuming any CDO issued since early 2005 is suspect, the exposure to subprime mortgages is about $350bn. Assuming the value of this collateral has fallen by, say, 20 per cent, the total loss would be about $70bn," the FT wrote on Saturday.
"Any self-respecting worst-case scenario should also reflect the wildly risky junk loans issued to fund leveraged buy-outs right at the top of the corporate profit cycle. According to the Bank for International Settlements, LBO loans issued since early 2005 stand at about $650bn. Assuming a 5 per cent "haircut" implies losses of $33bn.
"So, combined losses of $103bn. How significant is this? "Quite," is the answer. The capital of US banks is $850bn, estimates Lombard Street Research."
The paper makes the point that the capital adequacy of many groups involved in CDOs and similar securities (outside of the banks) is unknown, which raises the question, who will absorb the losses.
But is early days for an accounting cost: already the finger pointing and other early reactions are well underway.
Bear Stearns has already sacked the man who oversaw the two troubled hedge funds and other investments, brought in a replacement from outside, and shuffled other managers in the area to try and improve confidence in the bank that had $US75 billion in capital at the end of last year.
Hedge funds and similar investors (such as private equity funds) face a difficult time with June 30. It is the end of the quarter when not only are investments revalued (to produce the highly prized management and performance fees) but investors can also demand repayment of their capital and profits.
If there's a flow of investor money out of the funds, at the same time capital is being chewed up in falling asset values, we could see more problems ahead.
News of a Securities and Exchange Commission probe into two Bear Stearns hedge funds heavily invested in subprime mortgages added to concerns that the potential fallout could spread throughout the banking industry.
It is one of a dozen SEC probes into the subprime mortgage crisis and associated problems in areas like hedge funds and CDOs.
One company, privately held Bombardier Recreational Products, was forced to postpone a bank loan on Friday because of the unsettled state of credit markets, while another offering from a company called Service Master was delayed. The company's advisors are waiting until early this week to price a $US1.15 billion junk bond issue.
According to JP Morgan, only$US3 billion of new high-grade CDOs were marketed to investors in the latest week, compared to
