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Bond Outlook June 18th

Inflation and recession together, and central bankers recognising that they had better fight the former now than risk a greater recession later: what does that mean for fixed-income investors?

Bond Outlook [by bridport & cie, June 18th 2008]

Three major questions this week are of key importance to fixed-income investors adjusting their strategy. We shall give our own answers and seek the conclusions to which they lead:

Question 1: is the negative impact of the credit crunch on the economy now almost over? No, far from it. Real losses from defaults have yet to be recognised, and the impact of a serious credit squeeze has scarcely begun. Be very careful of accepting at face value any announcements by those in authority to the effect that the worst is over.

Question 2: is inflation under control? No, and it is likely to get worse.

Question 3: are central banks serious in their intensions to fight inflation by raising interest rates? Of the three questions this is the most difficult to answer, especially when so many respected commentators are asking whether Bernanke and Trichet have taken leave of their senses in speaking of higher rates when the economy is in such trouble.

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