Bond Outlook by bridport & cie, February 23 2011

Last week we described the three inter-linked threats facing both economies and financial markets:

• the weakening USD, and its declining credibility as the dominant reserve currency
• cost-push inflation from rising commodity prices
• demand-pull inflation in the East (exacerbating cost-push inflation in the West)

As it happens, this last week has seen all three threats become more apparent. We continue to see the release of various positive data from the US (see Focus) but, in stark comparison, little in the way of plans to deal with their core problem of over-indebtedness. According to the FT, bond underwriting standards are declining, with the return of payment-in-kind toggles and covenant-lite loans. The decline in sales at Wal-Mart was given scant press attention, and what little coverage there was focused only on the negative implications (whereas it could be seen as an initial sign of the much needed belt-tightening). It is true that Geithner has emphasised unsustainability, and even expressed admiration for the UK’s austerity approach. He is hardly a charismatic leader, but at least has the courage to disagree publicly with the propaganda machine.