Bond Outlook September 2 2009

A combination of a suspect recovery in manufacturing in many countries, low bond yields, and stock markets which appear overbought, is leading many investors to question where even modest returns can be achieved during the remainder of 2009. We have made a couple of suggestions recently – floaters, linkers – and to these may be added perpetuals, but these are insufficient for a complete portfolio, especially when the prevailing mood among our fixed income clients is to take profits after several months of excellent performance.

Consider once again all the changes that have taken place during this crisis (with apologies for the ongoing repetition):

• The initial trigger of a burst housing bubble may at last be being relenting, a necessary, but not in itself sufficient, condition to prevent further falls in GDP
• economies everywhere are now more dependent on public, rather than private, business initiatives
• rebalancing in favour of more consumption in Asia and less in the “West” is underway, but still dependent on government initiatives
• securitisation and the “shadow banking” sector are far less active, reducing still further the current meagre investment opportunities
• major corporations are having little difficulty raising funds from bond and equity markets, but smaller enterprises are denied access to borrowing
• households are reducing their debt in favour of saving, resulting in reduced spending.