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Bond Outlook January 6 2010

With so much positive sentiment reflecting the assumption of a “normal” recovery, there is reason for caution. Government borrowing needs will increase interest rates in the USA and UK.

Bond Outlook [by bridport & cie, January 6th 2010]

In these opening days of 2010, there is positive prevailing sentiment in the financial markets, based apparently on optimism that a normal recovery is underway. That would imply expanding demand, increasing output and decreasing unemployment. For the world as a whole, this optimistic mood appears justified, not so however for the USA, UK and Japan, where government indebtedness is a millstone around the neck of the economy.

Unlike many commentators, we cannot see Japan as a “model” for what is to happen in the USA and UK. The continued trade surplus of Japan and massive domestic savings, which fund the government deficit, are key differences. The USA and UK still need funding from foreigners to sustain their internal and external deficits.

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