Tuesday, June 7, 2011

Government Bond Markets Global Outlook Fisher Capital Management Seoul

Government Bond Markets Global Outlook Fisher Capital Management Seoul - Conditions in the government bond markets have remained very difficult over the past month, and there have been further falls in some of the minor markets, especially in the euro-zone, because of continuing fears about sovereign debt defaults. The agreement reached by the member countries of the euro-zone to combine with the
IMF to provide any necessary support to enable Greece to refinance its maturing debts and avoid a default has had a poor response in the markets; but at least Greece has been able to make further bond issues; and the gilt edged market has coped fairly well so far with a disappointing Budget statement that has left any real attempt to resolve the serious UK debt problems until after the general election. But the sudden weakness in the world bond markets after a series of disappointing auctions has once again increased the tensions.

Our position remains unchanged; any existing exposure to bonds should be further reduced in favor of US & Euro equities.

Fisher Capital Management Seoul, South Korea - The global economic recovery is developing slowly, and so short-term interest rates
are likely to remain at low levels for a considerable period. It is also possible that
the “fudged” agreement amongst member countries of the euro-zone will provide
an opportunity for the introduction of the necessary austerity measures; and that
a new government will finally begin to address the debt problems in the UK. But
the risks in the situation are still increasing, sovereign debt defaults may still occur,
and the single currency system in the euro-zone may not be sustainable in its present
form. Higher bond yields therefore appear unavoidable; prospects for all the bond
markets are unattractive.

Developments in the bond market over the past month have clearly illustrated the
need for caution. The US economy continues to recover. The Fed has left shortterm
interest rates unchanged, and has indicated that they will remain “at exceptionally
low levels for an extended period”. This tended to enhance the “safe haven” status
of the US equity market for most of the past month, as conditions continued to
deteriorate in other bond markets.

Fisher Capital Management Seoul, South Korea - Most of the available evidence supports the view that the economic recovery is
continuing, but only at a slow pace. The unemployment rate remains close to 10%,
and the housing sector is still depressed, with both new housing starts and sales of
existing homes weakened still further by adverse weather conditions. However
retail sales are holding up fairly well, and manufacturers are beginning to increase
capital expenditures and inventories, and so there is a general expectation that
growth in the first quarter will be around a 2% annualized rate.

Fisher Capital Management Seoul, South Korea - The Fed has confirmed that its buying programmed for mortgage-backed securities
has ended, and that it may be moving slowly towards re-selling some of these
securities; but it seems to be in no hurry, and so both the economic background,
and the position of the central bank, remain broadly supportive.

The situation facing investors in the mainland European bond markets is more
serious. The economic background is improving, with the weaker euro providing
considerable support in export markets, and so the area continues to move out of
recession. But progress is slow, and so the European Central Bank is maintaining
very low short-term interest rates, and providing support. However the massive
fiscal deficits are threatening to overwhelm the bond markets and to lead to sovereign
debt defaults, and so investors have continued to switch from the bonds of the
weaker countries into those of the stronger countries, and have widened the yield
spreads across the markets. The latest Greek bond auctions have received only a
very moderate response, and there is considerable uncertainty whether even the
markets of the stronger countries are adequately discounting the risks in the situation.

Fisher Capital Management Seoul, South Korea - The available evidence on the performance of the euro-zone economy is mixed,
but slightly more encouraging. The weakness in domestic demand is continuing,
and retail sales volumes are disappointing in most member countries; but the
manufacturing sector, especially in Germany, is much more buoyant, with exports
providing most of the momentum. The latest Ifo index of business sentiment in
Germany is sharply higher, and other countries are also sharing in the improvement.

Analysts are therefore forecasting growth around the 0.5% level in the first quarter
of the year.

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