Bond Outlook December 5th

Last week the Tuesday upturn in stock markets continued into Wednesday before fading out. We see a parallel with US consumers also having a fling before the credit squeeze and economic slowdown eventually overcome their prodigality. Surveys showing consumer confidence at new lows appear at the same time as those which show spending reaching new highs! While all expectations on bank lending capacity are pointing down, consumer borrowing is still increasing! This situation cannot last, because:

• Losses by banks are far from all being declared or even identified
• Loan write-offs are increasing, be they mortgage loans, credit cards or “other consumer loans”
• The government-sponsored mortgage agencies are in trouble
• SIVs are being brought back on to bank balance sheets
• Commercial paper is being replaced by lines of credit
• House prices are relentlessly declining
• Food and energy prices are climbing and general inflation beckoning

Maybe the sentiment is that next year will be so difficult for consumer financing, and prices so much higher, that it is better to borrow and buy now, while it is still possible.