Bond Outlook [by bridport & cie, September 7th 2005]
| "Not as bad as it might have been", then "much worse than we thought", now "recovery well underway"; thus has opinion about the economic impact of Katrina swung back and forth this last week, reflected faithfully by the exchange rate of the USD, the performance of the stock markets and the price of bonds. 10 year yields are now back to exactly where they were before Katrina, but with the whole curve pivoted anti-clockwise around the 10 year point. Such behaviour looks very anomalous and we would hesitate to conclude that yield curve flattening is over. Indeed, curve steeping this last week is due to markets supposing that, faced with such a disaster, the Fed will refrain from raising its rate further, or will at least pull back from two rate hikes to only one over the rest of this year. We do not "buy" that argument either. |
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| Admittedly, making a call on Fed action after a major event is fraught with difficulty. Did the post Katrina Bush/Greenspan meeting include an appeal to the Fed to return to pumping liquidity? We think not. |