Bond Outlook July 29 2009

Consider these signs of investor optimism:

• Stock markets have made major gains
• Most new issues of corporate bonds remain oversubscribed
• Spreads and CDS rates have contracted significantly
• The US Treasury is having no problem in issuing record quantities of T-Bonds

Now compare this with indications from the real economy:

• Unemployment continues to rise alarmingly
• Moody’s expects further bank write-offs of USD 400 billion in 2010
• Retiring baby boomers are entering into savings mode with an estimated USD 400 Billion reduction in spending (over the next couple of years)
• BP’s chief Executive sees the recovery as “long and drawn out” (thank you, Tony Hayward – that is our “L-shape”!)
• Credit-card defaults are rising with card issuers facing new, but as yet unquantifiable, losses

It is not as if investors are switching to shares from bonds or vice versa.