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Banking

Bond Outlook June 6th

Bond yields moving towards higher levels spells out a new environment in which good returns from bonds and shares will be hard to come by. Watch for further USD vulnerability.

Bond Outlook [by bridport & cie, June 6th 2007]

The current dominant theme so far as bond markets are concerned is that overnight interest rates are not moving in the USA, but are rising just about everywhere else. It seems unlikely that the ECB rise to 4% today will be the last. In addition, yields at long maturities are on the rise everywhere, including the USA. With yield curves gradually dis-inverting, long maturities are becoming less attractive, and we have accordingly shortened our recommendations in EUR and CHF.

 

The role of bonds to protect capital and provide a known return remains untouched, but as a route to extra performance, bonds look rather poor compared with equities. We have long learned to limit our comments on equity markets, but cannot resist noting the effect this week of Bernanke’s words that the US economy is likely to rebound in the near future. Far from creating enthusiasm for stocks, the effect was to pull back the indices from their highs. The change to an environment of rising yields may therefore signal danger for equity investments.

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