Bond Outlook June 20th

Concrete evidence has now come forth to confirm much of what we were surmising last week, viz. that the reserves of surplus countries are being directed away from US T-Bonds and towards equities, direct or indirect. The evidence was presented this week by John Maulden quoting from Treasury International Capital: in April almost USD 100 billion was invested in Agency bonds, corporate bonds and equities, allegedly by private investors. But how private were these investors? In the case of China or an oil-rich Arab state, where does central bank policy end and government "guidance" to commercial banks begin? The new "sovereign wealth funds" do not have the status of "Official Foreign Institutions", but they are certainly handling vast sums accumulated from trade surpluses.

The "wall of liquidity" entering the USA from abroad is as high as ever but has now changed style, bringing the USD yield curve closer to normal, but also pushing the stock markets to new heights and spreads on low-credit bonds to new lows. Echoes of the late 90's stock market bubble are obvious.