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Banking

Bond Outlook May 7th

All the economic news is negative or not so bad as expected. We therefore suspect a bear trap, which may even extend to some bonds. Beware Credit Default Swaps.

Bond Outlook [by bridport & cie, May 7th 2008]

One of the inevitable results of masses of cheap liquidity is that its search for a home creates bubbles, i.e. it pushes asset prices up beyond anything that might be called underlying value or the result of matching basic supply and demand. One such bubble is commodities, and another, the resurgent stock market. That, at least, is our best explanation of rising stock markets despite a plethora of negative news (increasing losses in the financial sector, ever tighter credit, mortgage losses at Fannie Mae, many bankruptcies and the like). The “good news” is now expressed as “but not so bad as expected”, and this phrase can be applied to unemployment, GDP, consumer spending, etc. This situation has all the makings of a bear trap.

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