April 30 (Bloomberg) -- Demand for bonds, and investors' complacency toward risk, can be blamed for the record early delinquencies and defaults on subprime home loans, speakers at an industry conference in Miami said.

The poor performance of subprime home loans made last year stems from an average drop of at least 0.50 percentage point in the yield premiums for credit risk on all types of fixed-income assets since 2000, Mortgage Bankers Association Chief Economist Doug Duncan said, citing research by other economists.

``That allowed another cohort of borrowers to get into homes that wouldn't have if credit spreads were wider,'' Duncan said yesterday, citing cheaper loans and looser underwriting.

Investors, seeing ``clear signs'' that subprime home loans had gotten too risky, didn't pull back from the securities because of the ``increased global liquidity and increased quest for yield,'' according to Stefaan DeDoncker, head of asset- and mortgaged-backed securities in the structured credit group of Fortis Bank SA in Brussels.

``Deals would get oversubscribed from the moment they were announced, even before you could get a look at the collateral characteristics,'' said DeDoncker. Fortis's 35 billion euro investment portfolio is about 60 percent in U.S. assets.

Late payments on subprime mortgages, to borrowers with poor credit, reached a four-year high of 13.3 in the fourth quarter, according to Duncan's Washington-based trade group. Early borrower trouble loans made in 2006 has surpassed what occurred with 2000 loans. Losses may exceed that year's record of about 6 percent, according to New York-based Moody's Investors Service.

The conference was hosted by Information Management Network, a New York-based meeting organizer. More than 1400 investors, bond issuers and industry representatives attended.

Foreign Demand

The U.S. bond market has been flooded with money first transferred overseas to China, oil-producing countries and other nations through trade deficits, said David Wyss, chief economist at New York-based Standard & Poor's. Their higher savings rates, he said, means the cash returns to the world bond markets.

U.S. bonds have been attractive because of higher yields on government debt, and because the nation has the ``only large and liquid private bond market,'' which offers even greater yields, Wyss said in an interview. Of the $1.1 trillion in foreign investments in the U.S. last year, 89 percent went into bonds, Wyss said, citing Treasury Department data.

Collateralized Debt Obligations

Spreads on typical floating-rate BBB rated bonds backed by subprime mortgages rose to a record 5.5 percentage points over the one-month London interbank offered rate in mid-April in secondary trading from about 1.5 percentage points in early February, according to RBS Greenwich Capital Markets.

The spread has fallen to about 4 percentage point, Peter DiMartino, an analyst at the unit of Royal Bank of Scotland, wrote today, while noting many issuers continue to fail to report sales prices for low-rated bonds from the deals.

When spreads were falling, managers of collateralized debt obligations, which repackage mortgage bonds or other assets into new securities, became unable to find acceptable yields with high-rated debt, said Katy Huang, head of structured products at Avendis Capital SA, an asset manager in Geneva and London. So they started creating more ``mezzanine'' CDOs, which focus on low-rated debt, she said, helping fuel demand for riskier deals.

Some investors limited to buying bonds with high ratings sought out the highest yields despite the returns being a reflection of what some considered the ratings companies' ``willingness to rate to more golden times,'' said Barry Weiss, a vice president at Harbourview Asset Management, an OppenheimerFunds Inc. unit in Denver managing about $40 billion.

`Shared Responsibility'

``For the last 60 days we've had everybody blaming everybody else'' for rising subprime defaults, said Eric Christensen, manager of business development and sales for a division of Fair Isaac Corp. in Minneapolis.

That includes his own company, which some analysts and lenders complain offered credit scores to consumers that weren't predictive enough, Christensen said yesterday. ``I always have to smile when I hear people say that and work with them to show them that really isn't the case,'' he said.

Any talk of blame misses the ``shared responsibility'' said Christensen. ``You don't have lenders lending unless you have someone willing to purchase it and someone willing to rate it.''

Michael Bykhovsky, chief executive officer of Applied Financial Technology Inc., a San Francisco-based company that creates models for bond investors, disagreed. ``I think it's the investors that have been screwing up'' by relying too much on the credit ratings of firms like S&P and Moody's.

``The whole idea of bond ratings is antiquated,'' Bykhovsky said yesterday. ``It might be applicable to corporate bonds, but it's not applicable to mortgage bonds, where it's so complicated,'' because returns can depend on interest rates, appreciation, home sales, economic growth and other factors.

Managers of portfolios with CDO investments backed by subprime bonds now are being asked by superiors, ``Why did you buy this?'' Huang said. ``As you can imagine, the typical CDO buyers are not in the market right now actively buying.''

To contact the reporter on this story: Jody Shenn in New York at jshenn@bloomberg.net

Last Updated: April 30, 2007 17:12 EDT