I'm sorry I didn't answer this earlier but it's been a very busy week. Lehman, it turns out, is one of the smaller dominos. Today, only a few days later, attention has turned to much larger firms. There is no doubt that what we are experiencing is a life-time event.
What we can expect in the bond market is an extreme rush to quality. That means Treasury yields will fall and the spread between Treasury yields in lower quality credits will expand significantly even as basic interest rates fall.
While the first impact will be lower interest rates, we need to be concerned about the long term effect of having multiple governments expanding the money supply. It is very difficult not to believe that we won't see future inflation and higher interest rates. The question is when, and how much higher?
Scott
