Bond Outlook December 10th

Allow us to begin with a summary of our key views on the macro-economic scene as developed over the last month:

• Government bonds are overpriced. They show all the signs of a bubble
• Good quality corporate bonds are underpriced (but the focus needs to be on new issues and on “young” bonds in the secondary market)
• The USD is vulnerable in the long run, certainly, but in the short run also, as the Fed is printing money and foreigners are likely to lose interest in holding USD or USD assets
• We have been recommending long maturities for government bonds. It is now too late to move there, and profit taking is appropriate

All these things we have already said before, but we would add one more item:

• Emerging bond markets have suffered along with other asset classes, yet our old predilection for emerging market sovereign bonds in domestic currencies, especially Brazil’s, is reasserting itself as currencies have found support at a lower levels and the fundamentals remain solid

We have also described the financial market crisis as a gigantic side show, unnecessary, at least in its scale, and that can be righted in a matter of months.