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Bond Outlook October 21 2009

Current improvement in corporate earnings and stock and credit markets depend on cheap money, lower wages and higher productivity. Can that last? Is it a way out from the impasse?

Bond Outlook [by bridport & cie, October 21st 2009]

Our recommendation this week is merely a reiteration of last week's: there is still mileage in lower credits, but some form of insurance is required to hedge against the risk of inflation, together with a certain readiness to change tack if and when curve steepening begins in earnest and spreads start widening. The risk of inflation is now broadly recognised, both in terms of comments published by fund managers and also by the behaviour of financial markets (demand for "out of the money" interest rate options and the price of TIPS). "Linkers" in EUR however do not yet seem to reflect changes in other markets.


The growing public indignation at (some) banks' profits and bonuses is spawning a growing political determination for more stringent regulation. The Brussels proposals on derivatives are one important dimension, whilst increased capital requirements are another. There is however a rising tide of opinion on both sides of the Atlantic which views as unacceptable the moral hazard created by the assumption that the major banks are too big to fail.

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