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Bond Outlook February 24 2010

Illiquidity has returned to bond markets. Confidence everywhere is falling. Profligacy has moved from the private to the public sector. Where can it lead?

Bond Outlook [by bridport & cie, February 24th 2010]

Unfortunately the illiquidity in bond markets which appeared a fortnight ago has returned after the respite of a holiday week. Bid/ask spreads are widening and screen prices are unreliable. The lack of confidence among market makers is mirrored by renewed declines in consumer and business confidence data. The recent strengthening of the USD has put the dollar carry trade at risk, with a strong likelihood of short-dollar positions being unwound and the non-dollar assets concerned falling in value. The Greek problems are on hold, but in no way resolved. No wonder doubt is emerging in financial markets.

We nonetheless have every confidence that Greece will ultimately be bailed out, allowing the country to avoid default, and its currency to remain within the Euro. Any solution however is likely to be merely a treatment of the symptoms, whereas the problem is chronic: a single central bank representing the interests of many governments, each running their own budgets with differing levels of fiscal responsibility. We have drawn parallels between Greece within the Euro zone, and individual states within the US.

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