Bond Outlook April 16th

The moderate optimism that we expressed last week, to the effect that the shift to a rebalanced economic world could be managed in an orderly fashion, seems justified by recent developments. In particular we can report that the fixed income markets are functioning more smoothly. Bid and offer prices are now pretty much available, although actual prices are still different from screen prices. Even our “bête noire”, structured products like CMS (Constant Maturity Swaps), have a price. It might only be 50 to 60% of par value, but at least the market makers currently seem to be trying to fulfil their responsibilities again.

This does not mean that the credit crisis is over. As the FT points out, a new chapter is beginning as the holders of various tranches of CDOs based on defaulted mortgages fight among themselves as to who gets what from the remaining value and cash flows (holders of senior tranches may be able to override any rights holders of other tranches believe that they had/have). Neither does it mean that there is a way back to the economic world of pre-2007 (we consider the watershed to be January 2007, when HSBC announced its sub-prime losses and the current crisis became apparent to us, although the seeds were sewn much earlier by Greenscam).