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Bond Outlook August 26 2009

Markets are again acting more on hope than on a sombre assessment of fundamentals. How does this affect fixed income investors, especially if they take profit?

Bond Outlook [by bridport & cie, August 26th 2009]

After our muted rejoicing last week that the world is undergoing its needed rebalancing, the time has come to look at what is still, for the West at least, the most important single economy: the USA. The more we look, the greater the discouragement we feel, along with a sense of wonder at whether financial markets are looking at the same data as we are. Again we see a divergence between market sentiment and economic fundamentals.

The fall in GDP may have been stopped by the various stimulus programmes including “cash for clunkers” and the USD 8,000 subsidy for first-time house buyers. The former is a victim of its own success and has been discontinued ahead of schedule, and the latter is to end on 30 November. The stimuli have supported household spending but the overwhelming pressure on households is to reduce debt, i.e. cut back on spending. What we called many months ago an “L-shaped recession” is not just a widely held view but is now “official” in the sense that Government and Fed data are saying the same thing.

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