Since that fateful day last July, when Bear Stearns said, “Hey guess what lads. Two of our hedge funds are worthless,” the US Federal Reserve has cut its key interest rate by 3%; during the same period the European Central Bank has cut by precisely bugger all. And the Bank of England is piggy in the middle, having cut rates by 0.5%.

But despite accusations ranging from “bloody mindedness” to “inflation control freaks” could it be that the European Central Bank is right and the Fed is wrong?

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“It’ll work Rodney, I’m telling yer. I’ve been looking at these ‘ere interest rates down the market and I reckon that if we borrow money over a short period, say 3 months we would only have to pay 5.5% back in interest. We invest that money for longer periods and get paid 7.5% interest. And if we do that in millions of pounds, this time next year we’ll be millionaires. Lovely Jubley!

Del Boy’s plan wasn’t an original one. This very simple idea has made a lot of clever people rich, but like so many of Del Boy’s ‘get rich quick’ schemes it failed due to a simple oversight.

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Folks one and all, hope you are having a fun time playing in the markets.

It has been 7 trading days since sub-prime market issues sparked a slump in the equity markets and, slightly weirdly, we seem not much closer to knowing whether there is more ‘correction’ to come or not.

Last Monday FT wrote a great post explaining what a ‘sub-prime mortgage’ is, how these mortgages get lumped together and traded as packages (sometimes called CDOs) and why we should give a damn. If you haven’t read it recently I’d strongly suggest grabbing yourself a reminder.

However that was a stuff-load to cover in one post. So I’m gonna ruminate, elucidate and hopefully illuminate a few more of the reasons why investors are losing sleep and spread bettors looking to go short are drooling with anticipation.

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Just over a week ago, when I wrote my last trade diary, the FTSE was around 6530. It had had a major drop the week before and all the news was negative. So I thought about the situation is a cool, calm and collected manner and decided that I was still bullish. Then I … did absolutely nothing.

Ooops. Since writing that post the FTSE has closed up (meaning the closing level was above the opening level, i.e. it has risen) every single day. Talk about boats being missed. 

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In the first part of this post I said I would talk about what makes the price of bonds go up and down, and try to unravel some of the spaghetti linking the bond and stock markets. 

So let’s jump straight in. What causes a bond price to vary? Several things. One is how reliable people think the issuer is, i.e. what are the chances the issuer won’t be able to make the bond payments.

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Bonds.

Normally they don’t get much of a look-in – newspapers and message boards spend far more time talking about shares, currencies and even commodities. Call me biased – and I am - but I suspect that’s because bonds are boring. If bonds were at a party they’d be the guy with the acne and the side parting that nobody wants to talk to.

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