Bond Outlook July 29 2009

Consider these signs of investor optimism:

• Stock markets have made major gains
• Most new issues of corporate bonds remain oversubscribed
• Spreads and CDS rates have contracted significantly
• The US Treasury is having no problem in issuing record quantities of T-Bonds

Now compare this with indications from the real economy:

• Unemployment continues to rise alarmingly
• Moody’s expects further bank write-offs of USD 400 billion in 2010
• Retiring baby boomers are entering into savings mode with an estimated USD 400 Billion reduction in spending (over the next couple of years)
• BP’s chief Executive sees the recovery as “long and drawn out” (thank you, Tony Hayward – that is our “L-shape”!)
• Credit-card defaults are rising with card issuers facing new, but as yet unquantifiable, losses

It is not as if investors are switching to shares from bonds or vice versa. It seems rather that a wall of liquidity is looking for a home without much attention being given to fundamentals.