The woes of the US sub-prime mortgage market continued to worry stock markets all over Asia. On 6 August 2007, the Straits Times Index (STI) fell 127.05 points, or 3.7%, to end at 3,308.99, the sharpest one-day correction since 28 February.

The other bourses in Asia were not spared either; but STI was the worst hit.

Banking stocks came under immense selling pressure over their exposure to high-risk property loans in the US through their investments in collateralised debt obligations or CDOs.

CDOs are bonds further divided into tranches that give investors in each tranche different rights to the cash flows earned on the parent real estate bonds.

CDO issuers can create many different new securities such as low-yielding fixed income debt, which is very safe, to high-yielding equity-type instruments which are riskier. The CDO issuers then resell the different securities to different investors the world over.

Wealthy individuals and institutional buyers consider the higher yields tranches as more lucrative as they earn more than government bonds which have lower risk.

As all three local banks are exposed in one way or the other in such CDOs, their counters came under intense selling pressure yesterday.

§ OCBC share price fell to $8.25 which represented a 5.2% loss.

§ United Overseas Bank share price fell to $19.70 which represented a drop of 6.2%.

§ DBS Group share price fell to $20.90 or by 4.6%.

In all, the STI has fallen 6.7% in two weeks after the US sub-prime market woes were highlighted recently.

Edited by Sam Gian
(Singapore's Independent Real Estate Trainer & Consultant)

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