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Bond Outlook May 16th

As if a housing bubble were not enough, a new one is inflating in junk bonds linked to LBOs. 1989s revisited? Even “toggle bonds”, a new name for “bunny bonds”.

Bond Outlook [by bridport & cie, May 16th 2007]

A widely held assumption about the USD yield curve's inversion is that the price of long bonds is bid up by the demand from the central banks of surplus countries. Now another phenomenon has crept up on the market, also keeping prices up and yields down at the long end of the curve: there is currently a shortage of supply of T-Bonds. Corporate profits are high and household earnings are being maintained, with the result that tax receipts are rising and the internal deficit of the USA is falling, and with it the need to issue Treasury bonds.

In the meantime, the external deficit has scarcely changed, so something must have replaced the low growth of government debt.

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