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Bond Outlook August 8th

A major step to world rebalancing has taken place with credit markets reflecting a more appropriate risk/reward relationship. We would see Bernanke accepting a slower US growth as desirable.

Bond Outlook [by bridport & cie, August 8th 2007]

Just how fundamental a change has already taken place in market conditions seems to have escaped the attention of stock markets, ever ready to roll forward again after each downward adjustment. In contrast, credit markets reflect a real sea change, which may best be described as shift from a borrowers’ to a lenders’ market. Spreads are widening, downgrades increasing and a variant on bond terms has (re)emerged in the form of “step ups”, whereby coupon rates increase by 25 bps for each level of future downgrade. The entire risk/reward relationship has now changed in favour of top-quality bonds.

The contagion of the US sub-prime/CDO crisis has spread far beyond the American borders. In fact, it is quite symbolic that HSBC was the first bank to announce, back in January, that it had lost money on the US sub-prime market. Seven months later three German banks are admitting problems. The de facto credit squeeze, even for banks not taking direct hits from sub-prime, is also spreading far afield, even to Kazakhstan! Here in Switzerland the press is reporting that Credit Suisse is ignoring the Swiss lending market in favour of international operations, but will be facing a reduction of profit due to the sub-prime effect.

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