Moody's: Subprime-backed bonds, CDOs disappearing

By Laura Cochrane

Aug. 21 (Bloomberg) -- Subprime mortgage-backed bonds lead credit products rendered ``extinct'' by the collapse of the U.S. housing market, according to Moody's Investors Service.

Collateralized debt obligations packaging loans and structured investment vehicles will also disappear as investors refuse to buy debt linked to U.S. housing market losses, Jennifer Elliott, Moody's group managing director in the Asia- Pacific, said today at conference in Melbourne.

``These are products that have just disappeared and we certainly don't expect to be coming back,'' Hong-Kong-based Elliott said. ``There is an overwhelming level of investor concern about what will happen in credit markets, as opposed to what has happened, that is impacting issuance.''

The worst U.S. housing slump since the Great Depression has triggered more than $504 billion of writedowns and losses at the world's biggest financial companies, many of which sold and invested in securities based on American mortgages. Subprime mortgage bonds made up almost half of the world's home loan debt securities prior to the housing collapse, Elliott said.

Structured investment vehicles, which operated by selling short-term debt to buy higher-yielding assets, have been forced to wind down or have defaulted after the seizure in credit markets cut their funding avenues. Investors are also avoiding CDOs, which package mortgage-backed bonds and use the income to pay investors.

``We have seen far more contagion of risk than anyone anticipated,'' she said.

RMBS Sales Plunge

Sales of bonds backed by U.S. commercial and residential loans have fallen about 90 percent this year from the same period in 2007, Elliott said. Derivative-based securities have also plunged 90 percent and high-risk, high-yield bonds sales have been cut by 70 percent.

``We are not seeing much happening at the moment and yes it is the height of the vacation season in U.S. and Europe, but I think it is deliberate nothing is being done,'' Elliott said. ``We haven't had any real bad news for a while and that makes me nervous for the beginning of September.''

To contact the reporter on this story: Laura Cochrane in Melbournelcochrane3@bloomberg.net.