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Bond Outlook December 17th

The Madoff scandal crowns a year of serial disasters. Neither regulation not the hedge fund industry will ever be the same again. Obama is the focus of much hope.

Bond Outlook [by bridport & cie, December 17th 2008]

Our last Weekly of 2008 can scarcely be a cheerful one as we look back, although we can take some satisfaction in having warned readers on June 25th of the inevitability of recession resulting from the housing bubble burst, and of the need for flight to absolute safety before the credit crunch really hit (“if ever there were a “capital protection” period, this is it”). The temporary strengthening of the USD took us by surprise, but we alerted readers of its return to a declining trend four weeks ago. Our present stance is to continue recommending profit taking in government bonds and to seek yield in quality corporate bonds in those fields least affected by the recession.

We hypothesised last week that the Fed’s main preoccupation is the avoidance of deflation, and that all steps would be taken to avoid it even at the risk of overshooting and creating inflation. Cutting the target interest rate almost to zero is part of that battle. The Fed will now be going on a buying spree to buy all sorts of assets both government and private.

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