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Bond Outlook by bridport & cie, February 13 2013

Consider whether there are sufficient good signs in Europe to see this month as the “end of the beginning” (Churchill 1942).

Is good news breaking out in Europe? If so, it is hardly a flood – more of a sign of economic conditions returning to normal, as distinct from requiring intensive care at the hands of the ECB. Back in the late nineties, and again in the noughties, we found ourselves seeing dark clouds on the horizon when so many thought that the good times were irreversible. Today we find ourselves discerning rays of European sunshine when so many see nothing good about Europe. It is a more comfortable position than last year, when the best we could say was that the euro would survive because of the political will to make the single-currency experiment a success, and that Germany was both rich enough, and pro-euro enough, to ensure that success.


The good news in question includes the EU budget agreement, signs of life in the Greek economy, lower interest rates for peripheral country government debt, a return to the debt markets of Portugal, ahead-of-schedule repayment of commercial bank debt to the ECB, a total restructuring of Irish sovereign debt and improved manufacturing, at least in Germany, and the UK. Of course Spain and Italy are still sources of concern, and the threat of a return to power of Berlusconi quite worrying. We are not saying that all problems are solved, only that this looks like the moment when economic decline and despondency ceased, and hope reasserted itself.


Our clients are reflecting this modest return of confidence. Throughout January, they were net sellers of debt in euros and net buyers of debt in dollars. From the beginning of February they are again net buyers of debt in euros. Their confidence is directed towards corporate, rather than government, debt, which is another way of saying that the flight to quality no longer holds sway.


The Irish restructuring, with its massive lengthening of the maturity of government debt acquired by bank bail-outs, introduces a new tool in euro-zone economic management, viz., the purchase of government debt by a country’s own central bank, rather than the ECB. Maybe we had all forgotten that each country in the euro zone still has its own central bank; perhaps they will be assuming a more proactive role. If so, that will add a dimension to the negotiations on a banking union, which is progressing, but at a snail’s pace only, while awaiting the outcome of the German elections in September.


Economic recovery, strongly perceived by financial markets to be happening in the USA, and to a lesser extent in Europe, creates the fear or expectation of higher interest rates. Neither the Fed nor the ECB are exactly announcing imminent hikes, but they are slowing, or planning to discontinue, quantitative easing. For us that is like moving a patient from intensive care to the recovery ward. Enough fixed-income investors are seeking to hedge against the risk of rising interest rates, modest though it be, to demand floating rate bonds from industrial borrowers. Issuance has responded accordingly, first in dollars, but also in euros.


“Now this is not the end. It is not even the beginning of the end. But it is, perhaps, the end of the beginning ” (Sir Winston Churchill, November 1942)


Macro Focus



United States


Q4 labour expenses rose by 4.5% at an annual rate, accompanied by a decline of productivity at a 2% annual rate.


Record petroleum exports helped shrink the trade deficit by 20.7% to $38.5 billion in December to the smallest in almost three years, as the USA moved closer to energy self-sufficiency.


China traded more goods than the USA last year, despite China's economy being half of the size of the U.S. economy.




European officials are increasingly pessimistic about the chance of completing the drawing up banking-union rules by year-end. The biggest sticking point is the establishment of a resolution fund, which would take responsibility for failing banks. No German agreement on fund creation is expected before the election in September.


United Kingdom


December manufacturing production rose 1.6% from November, the biggest monthly increase for five months, boosted by output of machinery and equipment, as well as chemical products. Total industrial production increased 1.1 %, helped by a 3.2% increase in oil and gas production.


Inflation held at the highest rate since last May with consumer prices rising 2.7% from a year earlier.


Nevertheless, house prices slipped in January, falling, according to Halifax, by 0.2% from the previous month to an average £ 162,932 (which was 1.1 % higher than a year ago).




Despite an unemployment rate in January at the highest level in almost two years (3.1%), consumer confidence rose to the highest since April 2011 and retail sales jumped (5.1% YoY).


Consumer prices extended their longest decline in at least four decades in January. Prices fell 0.3% from a year earlier. The statistics office sees inflation at 0.2% in 2013 and 2014, while the SNB sees prices slipping 0.1% this year, before rising 0.4% in 2014.



Dr. Roy Damary