Fisher Capital Management: Government Bond Markets Global Outlook Part2

Fisher Capital Management: Government Bond Markets Global Outlook Part 2 - Our position remains unchanged; any existing exposure to bonds should be further reduced in favor of US & Euro equities.

The European Central Bank appears to share this view, although it has warned that the recovery “is likely to remain uneven”, and has kept short-term rates at very low levels. The bond markets have therefore continued to receive considerable support from the economic background and the actions of the central bank.

Fisher Capital Management Seoul, South Korea: However, these factors have been much less important than the fears about the debt problems in Greece and in other weaker members of the euro-zone. After considerable

prevarication, due primarily to strong German opposition to a bail-out; an agreement

has been reached amongst the member countries that, in conjunction with the IMF,

they will provide support for Greece if this becomes necessary to prevent a default

on its sovereign debts.

But the details of the agreement are very vague, and there is certainly no guarantee

that the country can carry out its promises to introduce significant reductions in

spending levels to reduce the size of its debts. The agreement has helped the country

to issue a further ¤5 billion bond; but it was forced to offer an interest rate of 5.9%

on a seven-year bond, 325 basis points above the equivalent German bund, and

that issue has subsequently moved to a substantial discount. Conditions have also

been made worse by the downgrade in Portugal’s credit rating, and so the pressures

on the bond markets are continuing.

Fisher Capital Management Seoul, South Korea: The gilt edged market has coped fairly well so far with the latest weakness in the

bond market, an inadequate response in the latest Budget to the debt problems in

the UK, and a warning from the Fitch rating agency that the government’s timetable

for reducing the fiscal deficit was “frankly too slow”, and that the country’s

credit rating was at risk. The economic recovery remains very slow, and the Bank

of England is holding short-term interest rates close to zero, so the market is

receiving some support; but in all the circumstances it is perhaps surprising that

it has managed to perform so well.

Fisher Capital Management Seoul, South Korea: The economic background in the UK remains depressed, but is slowly improving.

Retail sales bounced back strongly; the public sector continued its recruitment

programmed; and there has been a pickup in activity in both the manufacturing and

service sectors of the economy.

It was not surprising therefore that the Bank of England kept short-term interest

rates unchanged at the latest meeting of its Monetary Policy Committee and even

suggested that it would be prepared to reactivate its quantitative easing programmed

if this proved to be necessary. But this may not be enough to sustain gilt edged

prices at current levels.

Fisher Capital Management Seoul, South Korea: The latest Budget statement is forecasting a slightly lower fiscal deficit of £167 billion in the 2009/10 fiscal year, and a halving of the deficit by 2013/14; but there

is considerable skepticism in the markets about the growth assumptions underlying

the figures, and about the willingness of the politicians to address the real problems

involved in reducing the deficit. If there is no credible plan to achieve this reduction,

the country may well lose its AAA credit rating. Prospects have therefore become

even more uncertain, and a move to higher yield levels seems unavoidable.

Fisher Capital Management Seoul, South Korea: The Japanese bond market is slightly weaker over the past month. It is likely that this year, for the first time, bond issuance may provide greater support for the fiscal

deficit than tax revenues. This has already led to a downgrade on Japanese public

debt by Standard and Poor’s, and with new bond issuance this year estimated to

reach ¥44,300 billion, and to reach ¥55,300 billion by 2013, further downgrades

seem likely. Japanese institutional investors are used to financing massive deficits,

but it seems unlikely that deficits of this size can be adequately financed at present

yield levels. Prospects for the Japanese market therefore remain unattractive.