Back to the future: the return of the securitised asset-backed bond, issued this time by banks for their own needs. This plus Irish shenanigans on bank debt.

Good news all round except for the sting in the tail that US GDP growth is mostly dependent on deficit household spending. When will the unsustainable end?

Note well what King of the BoE is spelling it out, echoed by Trichet: an income squeeze in the West is unavoidable. No such recognition by Bernanke in the USA.

Struggles are emerging between governments nurturing weak recoveries and central banks wishing to dampen inflation. Bond markets may encourage central banks in raising rates, the BoE first, ECB later.

Europe’s bottom-up problems may be on their way to solution, contrasting with the USA where Federal budgetary deficits are spreading down to States and Municipalities, with rising yields for “munis”.

We consider whether yield curves will steepen and overnight rates be raised, and reach a conclusion as to the likely order for four major currencies.

Our faith that the EUR will somehow by held together by the efforts of European leaders is reinforced by the expanding role of the Chinese in buying European sovereign debt.

Trust in governments is declining, not least because to bail out banks on the backs of tax-payers is creating a political backlash. Yield curves are steepening.

It is back to normal in the USA: spend more, print money, collect fewer taxes and ignore market forces, which act far less severely on the USA than on Europe.

In a panicky market, opportunities abound for the cool-headed. We remain sanguine that the ECB’s resolve will succeed in a short-term bail-out, but that the EMU must be revamped.

The USA simply ignored the Dagong attack. Why spend energy battling the Chinese when there is quite enough conflict within the USA over QE2 and the competence of the Fed?

The USA simply ignored the Dagong attack. Why spend energy battling the Chinese when there is quite enough conflict within the USA over QE2 and the competence of the Fed?

Bond Outlook [by bridport & cie, November 10th 2010]

Constipation may better describe the situation of the US economy than champagne cascades, and the risk investors face is that relief may come in too big a dose!

For the moment this recommendation concerns only instruments in euros: cash or cash equivalents offer a return as high as 3-year corporates while allowing lengthening when long-term rates rise.

The Chinese are turning their attention to bailing out the Euro Zone with profound consequences for the EUR and for interest rates: the “Beijing Committee to Harmonise Euro Interest Rates”.

Economic management of encouraging M&A while ensuring SMEs have no access to capital is an excellent way to ensure little job creation, but can it really be what governments want?

When their indebtedness becomes really unsustainable, governments will not default in any classic way, but practise “financial oppression”, particularly on bondholders and retirees. Inflation will be part of this.

Whether or not Europe or the USA are in worse shape economically, their problems and therefore their solutions are quite different. Stimulus versus austerity.

To suppose a flat economy in today’s world is to be optimistic. So be it, as we think the differences between the USA and Europe favour the latter.

Whether or not Europe or the USA are in worse shape economically, their problems and therefore their solutions are quite different. Stimulus versus austerity.

We believe the fears of a double dip to be exaggerated, which makes bond markets vulnerable to likely yield rises. China takes a new step toward RMB internationalization.

The evidence is growing that the route taken by European governments in restoring confidence is proving more effective than the indecision and doubts across the Atlantic.

Did European governments have any choice in opting for austerity? We think not, as confidence must be maintained not just in financial markets generally but in sovereign bonds as zero-risk.

As the USA follows one path and Europe another, time will tell which is the better route to renewed prosperity. This is an experiment of historic import.

Politicians might say recovery and retranchment can go together, but that is clearly not the case. Recovery might now be four years off.

“Everyone” is into retrenchment, Europeans by political will, Americans under market forces. It remains to be seen whether sustainable growth lies the other side of the pain.

Recession to the left and stagflation to the right. Good luck to government on that tightrope! Be grateful for a moderate calm in Europe with the creation of the EFSF.

Look for two historic changes as a result of recent crises: the Euro zone will have more centralised influence on fiscality, and financial markets will never be as free again.

Three emergency operations in a row – US subprime, euro debt and UK deficit – apparently controlled for the immediate future. But the longer term still demands action. Some action is appearing.