Bond Outlook November 30th

The last week has seen swings in mood and expectations amongst investors:

• The ECB on again/off again statements about raising the refinancing rate on 2^nd December and questioning whether this is the beginning of sustained tightening
• Contradictory evidence as to whether the housing bubble in the USA is deflating or not (overall home sales down but sales of new houses up)
• Improved US consumer confidence and spending
• The US 10 year yield not rising as many (including ourselves) supposed and the yield curve partially inversing
• Evidence of improvement in European economies, but fears that the ECB rate rise and higher VAT in Germany will have negative impacts.

The EUR/USD exchange rate is particularly volatile, reflecting this uncertainty. It is not even really clear where the support for the USD is coming from. Asian Central Banks have reduced their purchases of T-Bonds, and so have the OPEC countries, who are rather putting their windfall wealth into local investments. It may just be a mass of private investors attracted by the higher yields in USD, but doubtful of the sustainability of this source of relative strength, or it may be mainly the impact of the "US Homeland Investment Act".