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Bond Outlook July 29 2009

Much cash chasing financial assets may have led to disconnect between positive financial markets and a negative underlying economy. And is China’s recovery sustainable (infrastructure building versus consumer demand)?

Bond Outlook [by bridport & cie, July 29th 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.

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