Bond Outlook [by bridport & cie, January 14th 2009]
| The situation in bond markets is developing much faster than usual. Our alert of October 2008, repeated last week, to take profits in government bonds and to move into quality corporates, has already become current practice, so much so that fixed-income investors are moving down the quality scale to, for example, new issues of single A bonds. A significant difference is emerging, however, between EUR and USD denominated issues. There are far more of the former and demand is currently keeping up well with supply. One consideration is that yields are higher in EUR so that any future widening of spreads would have less impact on the bond prices. Another is that Europeans are more at ease with companies they know (perhaps we should say the “devils they know”) than with US corporations now that the traditional big names like GE and the Government Sponsored Entities are no longer, or much less, available. |
| It is just possible that the term “bubble” will extend from government to investment-grade corporate bonds, but not yet. In both cases, “a bursting bubble” is misleading as it conjures up images of price collapses of tens of percent; the risk with both types of bond is much more measurable and limited. |