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Bond Outlook July 5th

The flight to safety has eased but only temporarily, as the fundamental cause, drying up of liquidity, remains. With positive interest rats in Japan, the JPY must strengthen.

Bond Outlook [by bridport & cie, July 5th 2006]

Has the flight to extreme safety ended? Spreads have narrowed, the TRY has bounced back, equities have recovered. UBS and Citibank affirm that investors are moving back from risk-averse territory. Is this a return to Goldilocks? We think not, as the reasons for the recent adjustments, encapsulated in the phrase "liquidity is declining", remain. The Central Banks of the leading economies are quietly proceeding with the implementation of their decision to rebalance the world's economy in a controlled way. One week of "now it looks like the Fed won't go above 5.5%" does not change the outlook.

Besides, markets seem to be overlooking the fact that the Greenspan era really is over. Unlike his predecessor, Bernanke is not focused on keeping the economy rolling along no matter the internal and external indebtedness. Rather he is committed to the rebalancing that the world needs for sustainable expansion, and, we suspect, has the US housing bubble firmly in his sights.

Our own view receives support this morning from the financial press.

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