Bond Outlook [by bridport & cie, November 22nd 2006]
| To what do a fixed-income investor's thoughts turn, when credit risk is so unattractive? The answer is "currency risk". We have clients who are cautiously diversifying into emerging currencies to seek better yields. We are also seeing purchases of CHF and JPY in a straight currency play. |
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| Last week we considered the fundamental trends for six major currencies (USD, EUR, JPY, RMB, CHF, GBP), a theme worthy of further consideration. The apparent stability of the exchange rates among the six hides the precariousness of the support of the USD and of the low exchange rates of both the RMB and JPY. We call it the "Central Bankers' Put", echoing the "Greenspan Put" of the turn of the century, whereby investor's risk appetite was sharpened by confidence that, if ever the stock market fell, Alan Greenspan would save the day by reducing interest rates and stimulating the economy. |
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| The Central Banks of the two great Asian powers, each holding massive reserves mainly in USD, "simply" buy more or fewer T-Bonds to fill the gap between the US current account deficit and private capital flows into the USD. |