Bond Outlook December 2 2009

The trend towards longer-dated new issues, which we identified a month ago, is accelerating. What does it imply? For once we find ourselves disagreeing with the Financial Times, which interprets the trend as a sign of confidence. We rather think that:

• borrowers are locking in low interest rates faced with the likelihood of yield curve steepening
• lenders are accepting longer maturities only because short-term yields are so low

Our own clients are not following this trend; if anything they are now shortening and we feel that this is the appropriate move as stimulus programmes are gently withdrawn.

Central banks are very conscious of the danger of unleashing major changes in the interest rate environment. At best they expect curve steepening; at worst, they fear letting inflation slip out of control. They must still be tempted to let inflation stay just under control at levels as high as 6% as a practical move to reduce the ratio of government debt to GDP.