Business-Insider

At 2am EDT the opening of the London Market created its normal spike in prices, but this time there was danger lurking underneath the surface. UK housing downgrades that wiped 10% off the value of UK Home Builders started Traders looking hard at the US Housing sector, and unless you own a pair of Rose Tinted Glasses that is not a pretty sight.

When DR Horton announced in the US that it was reporting earnings 40% lower than last year all Markets went on alert, but that paled into insignificance when news crossed the wires at 9am that the S&P were looking to downgrade $12b of US Sub-Prime Bonds. But wait there’s more; at 4pm EDT $5bn of Bond downgrades came from Moody’s, just to add fuel to the fire.

The affect of that move, if it were to happen, would be to force Institutions to have to liquidate positions in these Bonds, as they would no longer meet the rating criteria that are set for most Hedge Funds and Insurers to be able to hold. That would lead to a rapid liquidation of an already unstable Market, and any positive outlook for the housing sector would go straight down the drain.

The Yield on the 10 year Treasury note dropped to the lowest since February, falling 11 basis points, that in turn rocked the US $ as a lower Yield leads to a lower currency; it’s a bit like having an interest rate cut from the Fed.

Both rating agencies confirmed that they do not see the lending situation getting any better and until it does this kind of sub-prime, or ‘no credit qualification’, debt will just keep getting downgrades. A bleak picture for the housing sector and very little that can be done to resolve it, and a very uncomfortable picture for the $.

Be very, very careful touching this market until Europe opens with some decent volume, the volatility is here in spades, this could go anywhere.

These next few sessions will not be for the feint hearted, and may well just be the begining of a rout in the Bond market. Not even Mr Bernanke could rescue the ailing $ today.

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Analysis by TheLondonForexBlog.com