Bond Outlook March 26th

The same big three basic causes, an economy built on financial deficits, falling house prices and excess leverage remain unaddressed by all the manoeuvring of the Fed. Very clever manoeuvring it is, and necessary to avoid collapse, but only time and belt tightening can resolve the big three.

It is now possible to outline the unfolding of the big three's impacts in a number of areas:

• this is the end of a nearly free financial market and the beginning of tighter regulations. Public money is now at stake in the Bear Stearns rescue and in attempts to save the mortgage market, and public money implies a demand for more control
• the entire structure of securitisation has collapsed. It will have to be rebuilt, or replaced. If rebuilt, it must be more transparent
• bond insurance is still very unsettled. For municipal bonds, new entities are filling the vacuum: the Federal Home Loan Banking system, Dexia from Europe and Warren Buffett. Ambac has somehow maintained its AAA rating, but we cannot help wondering if this is real
• the mortgage market in the USA looks to be on the way to a quasi-nationalisation.