Bond Outlook October 19th
Euromoney, is part of the Delinian Group, Delinian Limited, 4 Bouverie Street, London, EC4Y 8AX, Registered in England & Wales, Company number 00954730
Copyright © Delinian Limited and its affiliated companies 2024
Accessibility | Terms of Use | Privacy Policy | Modern Slavery Statement
CAPITAL MARKETS

Bond Outlook October 19th

US capital flows have now changed to massive inflows for bonds, but net outflows for equity. This is propping up the dollar. We take the inflation danger very seriously.

Bond Outlook [by bridport & cie, October 19th 2005]

In August, bonds showed a big inflow into the USA, while equity showed a net outflow. Bonds had two positive components, foreigners buying US bonds ($ 84.1 billion), and Americans selling foreign bonds ($ 17 billion net). In contrast, net inflow for equity from foreigners dropped to $ 3.8 billion net, while Americans bought more foreign equity ($13.5 billion net). The resulting capital flow was easily enough to cover the current account deficit. The bond purchases were directed largely at corporate bonds. This appears to be in contradiction with the current widening of spreads on corporates. We offer two tentative explanations of this paradox:

 

  • The first concerns timing. As of October, corporate bond spreads have been marginally widening, suggesting that the foreign interest in corporate bonds may already be declining
  • The second is linked to the tax break encouraging US corporations to repatriate profits Corporate treasurers would quite naturally place the new funds in corporate bonds.

 

What is certain is that the dollar has strengthened with these net inflows and the root cause is the higher yields on USD bonds (which we have termed a "prop" to a currency which would otherwise be weak).

Gift this article