Bond Outlook June 28th

Even though we have long foreseen a move from a uni-polar to a tri-polar world, and see this shift happening before our eyes, it is difficult not to be obsessive about the US economic situation. Certainly financial markets are: they seem to be overlooking how well the rest of the world is doing even while the USA falters. Our hope remains that the decline in the relative consumption of the USA and of its currency be both moderate and managed, so that consumption elsewhere can take up the slack.

Clearly the optimism we would see in our hope of a rebalancing en douceur is not currently shared by financial markets. The flight to safety in bonds has become a flight to extreme safety in that spreads on all types of bonds are widening except government bonds and the highest quality corporates. Turkey is the worst case, the vulnerability to further declines we pointed out last week having proven correct with the benchmark 10 year bond in EUR losing 9 % in the last week.