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CAPITAL MARKETS

Bond Outlook June 7th

Amongst the current risk aversion, short-term opportunities may be arising in Brazil and Turkey, while emerging Asia may follow Russia’s lead in liberalisation of currency and financial markets.

Bond Outlook [by bridport & cie, June 7th 2006]

First it seemed that the Fed would take a break from raising rates in June as the hikes to date had done enough to moderate growth and calm inflation. Now, various Fed officials are re-emphasising the need to fight inflation, and a June rate rise is priced into the market. This has had a marginal positive impact on the USD, but that may be temporary, as a slow down in the US economy seems inevitable. Regarding the ECB, all expectations are for a rate rise, although the IMF has warned to make it modest, 25bps and then fairly shortly another 25bps?? The curve 2 to 10 in USD is now virtually flat and may invert, stay short. The curve in EUR remains positive, but even here stay short as problems arise in the Club Med, Italy in particular, pressure will remain on the longer rates. Risk-aversion is high: the indices of both MSI and CS show a massive drop in risk appetite over the last few weeks. The first victims have been spreads on emerging market bonds and sharp declines in the values of emerging market currencies, look to take advantage of “overshoots”.

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