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Bond Outlook March 25th

There may be no alternative to printing dollars and buying toxic assets, but beware future inflation and further dollar weakness. Europe is taking a different route focusing on inflation.

Bond Outlook [by bridport & cie, March 25th 2009]

A certain optimism has appeared this week, as manifested by the rally in stock markets, a drop in CDS rates across the board, and declines in emerging market (and even high-yield) bond spreads. The enthusiasm for new corporate bond issues also continues unabated; that a beer company can easily place new bonds is understandable, but when a steel company is able to do the same really is an indication that investors are anticipating an economic recovery. Convertible bonds are also attracting a lot of interest as a means of participating in an expected recovery.

This optimism has been brought about by the announcement of US stimulus packages, and Geithner’s plan to buy up bank’s toxic assets through a ‘public/private’ partnership scheme, which at first glance, appears to be too good an offer for institutional investors to turn down. This "deal" massively favours private investors, whist the downside appears to fall almost exclusively on the taxpaying public. It appears that only such a lop-sided proposal could persuade private investors to take the plunge in acquiring the toxic assets.

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