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Money in bonds?

THE last few days have seen a stumble in the bond markets.

The question analysts are contemplating is whether the rally on major bond markets is now officially over or whether this is simply a pause.

At the present levels, it would seem that the market has priced in a great deal of bad news on activity and stock prices, yet forthcoming indicators and corporate earnings results are likely to support bond prices.

The key issue is that the debate over the soft versus hard landing is not yet over.

This would seem to support the view that the environment will remain positive for bonds over the coming weeks.

The correction in the bond market we have had originated in a stabilisation of equity markets, combined with remarks from Fed officials and the Becker report indicating that Fed would not necessarily ease aggressively.

The absence of any major US economic data over recent days helped it to take hold.

Last week, the Fed eased rates. This was good for the stock markets.

This event, combined with a decline in bond yields over coming weeks, could result in a lowering of the risk premium on the S&P 500 to levels low enough to stimulate a durable rebound in prices over the medium term.

So if the scenario is one of a soft landing, the stock market in the US could rebound strongly.

On the other hand, if we saw a more severe 1982 type of recession, the easing by the Fed is unlikely to stimulate much by way of activity in the market.

This could see the market continue its slide for a few months.

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