Bond Outlook December 10th

The flight to quality is leading to a bubble in government bonds. A better yield/credit risk can be found elsewhere, notably in young corporate bonds and emerging markets.

Bond Outlook [by bridport & cie, December 10^th 2008]

Allow us to begin with a summary of our key views on the macro-economic scene as developed over the last month:

Government bonds are overpriced. They show all the signs of a bubble
Good quality corporate bonds are underpriced (but the focus needs to be on new issues and on “young” bonds in the secondary market)
The USD is vulnerable in the long run, certainly, but in the short run also, as the Fed is printing money and foreigners are likely to lose interest in holding USD or USD assets
We have been recommending long maturities for government bonds.