Bond Outlook July 9th
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Bond Outlook July 9th

While the CPI is way above target, asset prices, notably stocks and housing are falling. It may be therefore more meaningful to see this as a deflationary environment.

Bond Outlook [by bridport & cie, July 9th 2008]

It is not the great greatest claim to success ever made, but over the last few months the bond market has outperformed equities by incurring smaller losses than they, and our recommendation in favour of short maturities has similarly outperformed long maturities. In addition the FT tells us that over the last ten years, bonds have given a modest positive real return and equities a small negative return. This week may be heralding an opportunity to move from the capital protection mode to careful risk taking, but first let us consider the outlook for the economy, and, in particular, inflation.

Our view on inflation is changing as the economic crisis unfolds. The current overall inflation is obvious for all to see. Until recently we imagined that it could be brought under control only by repeated hikes in interest rates. Last week we argued that only one or two modest rises should suffice while awaiting the full impact of the credit squeeze. This week reinforces that supposition and even suggests that the economic environment is turning deflationary.

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