Bond Outlook [by bridport & cie, October 28th 2009]
| The sense is growing that the recovery is totally dependent on artificially low interest rates and explicit government subsidies, along with the fear or expectation that the end of quantitative easing (QE) will mean inflation. Discontinuing QE will put deficit governments in direct competition with the private sector in the bond market. The last few days have seen both US Government borrowing and new corporate bond issues move to longer maturities. The US Treasury will raise 40% of its financing needs at 10 to 30 years, pushing the average maturity of new issues out to 4-6 years. In the meantime new corporate issues are now typically at 10 years versus 3-5 years of just a few weeks ago. This reflects the majority deflation camp, of which we are not members, pursuing yield, while issuers are able to lengthen their maturities and lock in low interest costs. QE removes direct pressure on the yield curve as the funds for the Treasury are de facto conjured out of thin air. That sows the seed for future inflation while giving the illusion that all is under control. |