Bond Outlook by bridport & cie, October 6th 2010

Last week we alluded to the Beijing Dollar Rate Fixing Committee, to remind readers of who is exerting ever greater influence over the USD exchange rate. We now imagine that a second committee has been created to save the EUR, and influence its exchange rate, namely the “Beijing Committee to Harmonise Euro Interest Rates”, whose main weapon is to purchase, in as public a manner as possible, the bonds of wayward countries like Greece, Spain and Ireland. If you thought the “Greenscam Put” influenced stock markets, wait until you see impact of the “Beijing Put” on Euro Zone bond yields! The spread reduction on Greek bonds after Chinese promises is a foretaste of their growing influence.

As it happens, the Chinese support for EUR government bonds parallels their growing disenchantment with the USD and T-Bonds. Like it or not, the view that the world economy is partly decoupling from the USA (according to Stiglitz and other US economists) is dependent on China using its vast reserves to invest selectively and strategically. The whole basis of Chinese investment has nothing to do with the traditional parameters of risk and reward, but is based on expanding economic hegemony, and on dealing with more dollar reserves than they know what to do with.