Bond Outlook May 27 2009

Last week we identified the growing dichotomy between the market for corporate bonds issued in USD and those issued in EUR, which we believe may have macro-economic implications. That should not be too surprising given that the ECB is being much more prudent in “throwing money” at the problem than the Fed:

• In EUR, corporations are issuing a large number of attractively priced bonds, which are being easily absorbed by the market. We suspect a degree of under pricing is, to some extent, fuelling this demand
• In USD, there are far fewer new issues, the yields are very low and, so far as European investors are concerned, they are of little interest

What do these observations mean? One possibility is that US corporations have little to do with new money– little opportunity to expand or invest – so the need for borrowed funds is low. In addition the growing expectation of a weaker USD may be contributing to the low demand, at least from outside the USA.