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Bond Outlook April 9th

Neither excessive optimism or pessimism is appropriate. US recession is a key component of economic rebalancing and just may be being given the time and conditions for orderly work through.

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

Last week we had to resist being carried away by what we judged as excessive optimism that the credit crisis was nearly over, when, as we explained last week, what was really happening was a reaction to confidence that central banks would rescue any bank in trouble. This week the situation is more subtle. The euphoria is over, but there is no collapse in credit or equity markets. Instead, a sombre mood reigns, in which most investors must be saying “the crisis could be on the way to a resolution, or this could be a gigantic bear trap”. We would tend towards the latter view.

The moves by Citibank to clear the books of leveraged loans and establish a market price by selling back the loans to private equity funds deserves moderate applause, as does the recapitalisation of banks like Washington Mutual. Of course, it may wondered whether Citi is taking a responsible strategic view or seeking to unload assets quickly to shore up its capital base. Such ostensibly sensible moves must however be set against the IMF’s assessment of the cost of the crisis at USD 1 trillion, Bernanke’s admission (without actually using the word) that the USA is in recession, and the realisation that Asian and Australasian banks are also in trouble from sub-prime and its consequences.

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