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Bond Funds May Be Next to Feel Subprime Shockwaves
The Associated Press | September 10, 2007 | 03:39 PM EDT

Could the housing market's woes spread to bonds held in mutual funds by millions of ordinary investors?

Some experts -- and hedge fund investors who have made big bets that the mortgage crisis will worsen -- are saying that's exactly what will happen. Some bond funds that invest in riskier short-term debt already have been whacked by soaring default rates on bonds backed by subprime loans made to borrowers with weak credit.

Critics charge that Standard & Poor's, Moody's Investors Service and Fitch Ratings routinely give triple-A ratings -- the safest rating there is -- to far too many mortgage-backed bonds backed by subprime home loans.

"The rating agencies just completely missed the boat in their methodology for rating these things," said Janet Tavakoli, president of Tavakoli Structured Finance, a Chicago consulting firm.

About 80 percent of debt in bonds backed by subprime loans is rated triple-A, the same rating on virtually risk-free U.S. Treasury bonds, experts say.

If that seems shocking, there are bonds backed by delinquent credit card accounts -- one of the riskiest forms of debt -- in which up to 40 percent of the accounts in the security are rated triple-A, says Drexel University finance professor Joseph Mason.

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