Slowly but surely a credit crunch is creeping up on us, driven by the spiralling collapse of the subprime mortgage market and associated credit derivatives in the US.

Leveraged buyout deals are “drying up” according to a top Wall Street banker because of the uncertainty and drop in liquidity.

Our bond market yields haven’t moved much, but in the US they are now at 5.03% for the 10-year bond, compared to 5.01% the day before and 5.13% two weeks ago. They hit 5.32% in early June as the worries gathered pace.

Now investors in the US want security and have been moving into US bonds in a so-called flight to quality. Overly dramatic for us in sunny old Oz? Maybe.

Consider this: The Financial Times reports that Basis Capital, the Australian hedge fund manager that revealed problems last week, is in “crisis talks with creditors after banks seized and began to sell some of its investments linked to US subprime mortgages.”

”Creditors said Basis had missed margin calls – demands for additional loan collateral – on Monday for its Basis Yield Fund, and had appointed accountants Grant Thornton as restructuring advisers. The problems at the $US1bn fund manager follow heavy losses at two highly leveraged Bear Stearns funds investing in bonds linked to US subprime and the closure of at least two other hedge funds that followed a similar strategy.”

Those two Bear Stearns funds were revealed on Tuesday as being stony broke, with one completely wiped out and the other apparently covered by the $US1.6 billion injected by Bear Stearns to halt the slide in value and stop creditors liquidating the funds. Losses are at least $US2 billion, but could be more.

The Caliber hedge fund in London closed last month. It had $US908 billion invested in subprime mortgage related securities. Another set of smaller US funds based in Florida is shutting itself down after incurring huge losses. These funds had $US650 million invested, according to US business media reports.

GE is selling its troubled WDC subprime mortgage business that has already cost it over $US300 million in write-offs and more in the cost of slashing business and staff. GMAC, now controlled by a private buyout group, lost $US1 billion in subprime mortgages; HSBC, the world’s fourth biggest bank, has set aside $US10 billion or more to cover costs in lending on subprime mortgages and refinancing them.

Some of Wall Street’s biggest investment banks, including Goldman Sachs, JPMorgan and Lehman Brothers, are holding a reported $US11 billion in buyout bonds they can’t sell to investors because interest rates have risen. To sell these bonds now would incur tens of millions of losses — chickenfeed to these big banks but it would force the value of billions of dollars worth of bonds held across the US to be written down in value.

The head of JPMorgan confirmed the problem in a conference call with his bank’s second quarter results.

The Bank’s CEO, Jamie Dimon said demand for leveraged buyout debt is drying up and banks may be left holding more loans that they can’t sell.

”There is a kind of a little freeze in the marketplace,” Dimon said on the New York-based bank’s second-quarter earnings. ”’If you see this continue you will see the Street taking on a lot of bridge loans and more aggressive repricing of those things.”

US Federal reserve chairman Ben Bernanke has conceded the subprime problems will spread outside the US housing industry. Mr Bernanke said conditions in the subprime mortgage sector have “deteriorated significantly” and noted “increased concerns among investors about credit risk on some other types of financial instruments.”

But he said “even after their recent rise… credit spreads remain near the low end of their historical ranges” and added that business financing activity “remained fairly brisk.”

And speaking of housing, while the latest figures from the US Census Bureau showed a rise in housing starts last month, they also showed yet another sharp drop in the number of housing permits issued: they fell to their lowest annual rate in a decade.