Bond Outlook May 11th

The “slow-motion car crash” of GM, now joined by Ford, moved forward a frame with the downgrading of their bond ratings, or even two frames if you count Kirk Kerkorian’s “threat” to sort out GM. The jury is still out on the extent of knock-on effects to Hedge Funds and CDOs (Collateralised Debt Obligations). Our view is that the US economy is fundamentally unhealthy and the debate is not over whether a correction from its over-indebtedness will take place, but when, and whether it will be brutal or gentle.