Bond Outlook [by bridport & cie, October 31st 2007]
| Normally in our Weekly we follow the step-by-step developments of the US economy and its impact on the rest of the world. We identified the sub-prime problem very early this year, specifically when HSBC was the first bank to reveal losses related to sub-prime, and we reasoned that US household spending had to decline if consumers could no longer finance their excess spending by mortgage equity withdrawal. We were less prescient on the associated credit squeeze when mortgaged-backed assets proved so fragile, but so were a number of very senior bank executives! We likened the two themes to the heads of a monster attacking the economic system, and even added a monster’s tail in the form of unravelling the carry trade with subsequent major realignment of interest rates. Our principal observation this week is to emphasise that the monster is far from being slain. The sub-prime knock-on effect on consumer spending, the revelation of more CDO-related losses and the weakening of the USD have much further to run. Last week we surmised that insurance companies might be holding undeclared investment losses. |