Bear Sterns/Sub-Prime Fiasco Is Triggering a Flight From Risk

This article was prepared with the use of a BB article that is highlighted in italics. [I]Traders...are now snapping up Treasuries. Demand is being fueled by speculation that losses at hedge funds owning subprime mortgage bonds such as those managed by New York-based Bear Stearns and London-based Cambridge Place Investment Management LLP will spread and slow the economy.[/I] This kind of movement is very common to see when investors get nervous. It's a flight from risk as traders look to park their investments in safe assts like US debt. This usualy portends a drop in equity markets as traders become averse to vunerable assets. In this scenario, bond prices will rise as yeilds fall which will ultimatley help to support the consumer with lower rates for mortgages, equity loans, credit cards and car loans. It also indicates that spreads on corporate debt will re-price higher, as the premium for risk becomes more expensive. This could affect the LBO and M&A markets and I would watch to see how the price of stocks like Fortress Investments, Blackstone and other private equity firms and investment banks like Goldman move. KKR was rumored to be going public soon and that offering could be delayed. [I]Investors demanded an extra 1.46 percentage points in yield to own corporate bonds rather than Treasuries at the end of June, up from 1.33 percentage points on May 31. The spread for emerging market bonds widened 0.27 percentage point to 1.76 percentage points, according to JPMorgan's Emerging Markets Plus index.[/I] [I]Investors typically prefer Treasuries in times of turmoil. U.S. debt outperformed corporate and emerging market bonds last month for the first time in a year. Treasuries fell 0.2 percent, compared with 0.8 percent for corporate securities and 1.8 percent in debt of less-developed countries, indexes compiled by New York-based Merrill Lynch & Co. and JPMorgan Chase & Co. show. [/I] [I]Yields on 10-year notes fell to 4.16 percent during October 1998 from about 5.5 percent two months earlier following Russia's $40 billion default and the collapse of Long-Term Capital Management LP, the Greenwich, Connecticut-based hedge fund that required a $3.6 billion bailout from Wall Street banks. [/I] [I]The unraveling of hedge funds run by Greenwich-based Amaranth Advisors LLC in September contributed to a quarter- percentage-point drop in 10-year yields to 4.54 percent.[/I] As seen on the charts, the dollar lost around 2900 pips vs the JPY during that time, while GBP/JPY depreciated by over 4200. As investors again seek the safety of bonds, could a flight from carry trades be far behind? Full BB article: [URL]http://bloomberg.com/apps/news?pid=20601087&sid=aIv3wWnA2giY&refer=home[/URL]