Adding to the subprime fallout in the bond markets, the Wall Street Journal today updates the soap opera that has become Bear Stearns mortgage-backed hedge funds:

Two big hedge funds at Bear Stearns Cos. were close to being shut down last night as a rescue plan developed over several days fell apart in a drama that could have wide-ranging consequences for Wall Street and investors. Merrill Lynch & Co., one of the hedge funds’ lenders, said it would move to seize collateral — much of it mortgage-backed debt — from the two funds and sell it, according to documents reviewed by The Wall Street Journal. At the same time, the funds’ managers worked with a handful of other key lenders, including Goldman Sachs Group Inc. and Bank of America Corp., to pay off the funds’ $9 billion in loans, according to a person familiar with the matter. As of a few weeks ago, the two Bear Stearns hedge funds held more than $20 billion of investments, mostly in complex securities made up of bonds backed by subprime mortgages… In recent weeks, however, the firm’s High Grade Structured Credit Strategies Enhanced Leverage Fund and High Grade Structured Credit Strategies Fund have been besieged by investors and lenders trying to recover their money as the value of the funds’ underlying bonds fell sharply.

So it now appears two hedge funds at Bear Stearns have been hit. The article also notes that, as of yet, there hasn’t been evidence of broader industry fallout in terms of other investors looking for the exits. But this is a relatively illiquid market — which means it moves slowly — so my guess is that it’s only a matter of time before investors and traders start looking hard at the value of other debt securities they’re holding. That is, if they aren’t already doing so. Update: Calculated Risk cites a CNBC broadcast, reporting that JP Morgan and Deutsche Bank have joined Merrill Lynch in unwinding their positions in at least one (if not both) of the two troubled hedge funds at Bear Stearns. It looks to me as if the subprime bond crunch is about to enter open season.