Subprime crisis and the Australian Bond Market (1 Viewer)

[squance]

HEy!

What is the impact of the US sub prime crisis on price discovery and liquidity in the Australian bond market??

Would anyone know???

Would because people are defaulting in their mortgages in america so much that these mortgaged backed securities are failing and so they are more riskier so that interest rate for bonds are higher and so there isn't much liquidity in the Aussie bond market anymore???

I really don';t know
i need help!!

 

[seremify007]

Here's a great research paper I received;

http://www.filecrunch.com/fileDownload.php?sub=27f1b2807d5258e94438c280e88f1658&fileId=142649

If link above doesn't work, try http://www.savefile.com/files/1525766

 

[squance]

Here's a great research paper I received;

http://www.filecrunch.com/fileDownload.php?sub=27f1b2807d5258e94438c280e88f1658&fileId=142649

If link above doesn't work, try [URL="http://www.savefile.com/files/1525766"]http://www.savefile.com/files/1525766[/URL]

Thanks!!!
that was a prettty good report.
It made me laugh

Although...I still don't understand how the US subprime thing, even though its a US thing, would affect the bond market in Australia....

 

[seremify007]

I'm not sure on your knowledge so I'll give a very very basic overview;

1. People borrowed more money than they could afford to repay- hence the dodgy mortgages. Compounded by the fact that housing prices went down, this also presents a collectibility problem whereby even if they sell the house or underlying asset, the mortgage still isn't fully recoverable.
2. As many people, companies, funds, etc.. invested in these securitised products, they don't really know how collectible their investments are and the true value so are at potential risk of losing alot. This affected people all over the world.
3. As a result, people are holding onto their cash and liquid assets which have a more stable value- as opposed to a fancy product which promises a share of cash flows or risk of collectibility- and thus demand a higher yield/return in exchange for taking on risk. This means there is less funds available to be lent out and thus is known as the 'Credit Crisis' and that any funds to be loaned out, are thus at a higher rate (think supply/demand graphs in economics).

That being said, the bit which I can't figure out is how this interlinks with the whole US approaching recession and dropping int rates to stimulate economy. I suppose that would be to incentivise borrowings, and stop people from hoarding cash with no return.

With regards to how it affects Aussie bond market, I'd imagine it's to do with investors demanding higher returns for taking on risk; and also to do with the fact that the market interest rate (due to Monetary Policy and curbing inflation).