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Banking

Bond Outlook March 5th

The disarray in US economic policy in both the contradictory appeals by Paulson and Bernanke regarding mortgage bail-outs, and by a constantly changing approach to the monoline problem.

Bond Outlook [by bridport & cie, March 5th 2008]

My thoughts were of trouble, and mine were steady, so I was ready when trouble came. (Housman)

The trouble which markets have been going through for many months is steadily growing. The recommendation that we made weeks ago should have helped readers be steady: government bonds, long maturities, with a firm place for inflation-linked bonds, and a modest place for sovereign bonds in the domestic currencies of selected emerging markets, especially Brazil and Russia. To these we can safely add the AAA “supra-nationals”. Obviously many investors are indeed focusing on government bonds and, for the first time in the history of our company at least, a certain lack of availability of German government bonds among market makers has appeared. In contrast, spreads on Greek and Italian government bonds are widening in the light of economic and political weakness. The old convergence trade is truly reversing! In the current environment fixed-income investors are risk-averse to an extreme.

A month ago we opined that the US authorities could not possibly be contemplating letting the monoline insurers be downgraded, as the impact would be disastrous.

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