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Capital Markets

Bond Outlook August 23rd

Our attempt at answering key macro questions includes Fed hikes later in the year and another hike in the UK and Euroland. It will a close thing to avoid recession.

Bond Outlook [by bridport & cie, August 23rd 2006]

All investors are, or should be, asking themselves some very basic but difficult questions:

 

  • Will the slowdown in the US economy be gentle or severe? Merely slower growth or a recession?
  • Will the slowdown in itself bring inflation down to acceptable levels?
  • Has the Fed stopped hiking the overnight rate?
  • Will the decline in 10-year USD yields continue?
  • Is there now a “Bernanke put” in place, with the Fed ready to lower rates as soon as early 2007 if the slowdown borders on recession? (Or if the stock markets move down?).
  • Will USD weakness reassert itself?

 

Those are merely the USD-focused questions. To them should be added:

 

  • Will the ECB raise the refi rate one more time and then stop (perhaps in the light of the loss of confidence in Germany)?
  • Will the long end of the EUR yield curve stay down?
  • Will the BoE raise rates still more in view of inflation still being above the target rate?
  • Will the Chinese authorities succeed in slowing growth and switching funds flow from investment to consumption?

 

Our own answers follow but are necessarily modest and tentative.

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