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Bond Outlook February 11th

To encourage bank lending in the USA, the new Administration is following a stealth policy of moving bad assets to the Fed and good assets to the banks.

Pity Tim Geithner, blamed for an inadequate bank clean-up programme to the extent that stock markets fell even as he was unveiling the scheme. The reason seems to be an absence of clarity in the choice of insured or guaranteed prices versus “bad bank” purchases of toxic assets, and the basis of asset valuation. However, whilst details remain unclear, the clean-up programme points towards re-establishing bank lending and may therefore still be seen as a positive step towards halting the GDP decline. It also includes collaboration with the Fed, who are to set up a loan facility to lend against asset-backed bonds, and that seems better than having the Fed purchase T-bonds beyond its day-to-day market interventions aimed at achieving the target rate for inter-bank lending. We maintain our fears about a central bank buying long-term bonds of its own government. It appears that the Fed have the authority to follow this path, but are holding back. They threatened to do this a few years ago, with the effect that long-term yields fell, but never actually purchased any. They need to be careful of crying ‘wolf’ too often. Besides, we have no doubt that Bernanke has read all about the French experience post WW1 in this direction!

While the Geithner speech may be considered only slightly contributory to maintaining our optimism that the right steps are being taken to reverse the GDP decline, we take more heart in the relative easing of the corporate bond markets.

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