Bond Outlook [by bridport & cie, January 20th 2010]
| Consider this dream: moderate but steady growth has returned to the US economy, as a lower exchange rate allows exports to increase and the trade gap to decline. Households are continuing to deleverage, and are increasing their savings. The volume of funds they, together with institutional investors, are looking to place, are quite able to meet the needs of Federal borrowing. Thus government debt requirements will be met without raising the long end of the yield curve. |
| Such is the view held by a large part, possibly the majority, of financial markets, and propagated by influential commentators like Gary Shilling and a more anonymous group of economists interviewed by Bloomberg. |
| We see it as but a pipe dream. Unemployment in the USA is increasing steadily (and is grossly underreported because of the strange system that those who have ceased looking for a job no longer “count”). Household deleveraging – which we have long recommended and are now seeing – must mean lower consumption. Government borrowing can only maintain upward pressure on long-term yields. |