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Bond Outlook April 21 2010

The SEC’s investigations of the behaviour of Wall Street banks reflects a major shift in the US political will and of popular opinion. Financial markets are nonetheless more risk receptive.

Bond Outlook [by bridport & cie, April 21st 2010]

For many months we have been fretting about government debt, which is no longer being financed by quantitative easing, and must therefore compete with the private sector for funds, thereby pushing up yields. This is one of the major pillars of our argument that recovery can only be anaemic (the other is the forced commitment of households in deficit countries to save more and spend less). The fear about the private sector being crowded out is now finding support from the IMF in its “Stability Report”.


Yet the long-expected steepening in Government yield curves has, thus far, been surprisingly limited. Our recommendation has therefore been to lengthen in corporate bonds, while maintaining short maturities for government bonds. However, we cannot imagine maintaining this recommendation for any significant period of time.


The impact of increased government borrowing on medium-term yields is one issue facing fixed-income investors. The other, of course, is when short-term rates are increased. For the moment, only commodity-based economies, e.g. Australia, Canada, have lifted their overnight rates.

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