Bond Outlook by bridport & cie, September 22nd 2010

So much money and so little do with it! Corporations, already cash rich, are raising still more liquidity by issuing bonds, and there is no shortage of uptake. Yet they are not deploying these funds in a positive way for the economy. Very few are investing to expand their businesses. Some funds are being deployed in acquisitions, but that does little for employment since efficiencies through lay-offs are always the result of combining firms. There is some bond retirement through tender offers of short-term debt, a subject which (as we have already indicated) offers certain opportunities for fix-income investors. There are likely to be share buy-backs, at least that is what the FT identifies as a major arbitrage now underway and destined to support the stock market, despite the doubts about the legality of such operations if the funds have been raised via bond issue. However, most of this cash is just sitting on balance sheets, or perhaps invested in other bonds, thereby contributing still more to the mass of money looking for safe deployment, even at low returns.

In the meantime, banks are focused largely on strengthening their balance sheets.