Fixed Income Report

Many will be closely watching the actions of the US Federal Reserve over the next few quarters. The Cleveland branch of the US Federal Reserve (above).

We remain slightly bearish on global fixed income. In 2009, bond products received the ma-jority of fund flows, which we expect to be heavily curtailed in 2010.

Global fixed income products, which experienced a significant run up in 2009 benefitted sub-stantially from extremely dislo-cated prices and lower risk appe-tites. Valuations have returned to reasonable levels and despite the fact that they remain attrac-tively priced, the screaming buys of 2009 are no longer available.

The fixed income supply-demand picture remains mixed to slightly favoring the demand side, which could be supportive to the bond market in 2010 as there should be lower bond issuance (supply).

Global interest rates will most probably rise in 2010, (particularly near year-end), as monetary tightening is looming. This will put substantial pressure on the bond market as investors will be able to enjoy higher risk-free rates in comparison to to-day’s extremely low rates.

We remain underweight US Treasuries as ultra-low rates and increasing government supply should put pressure on spreads. We expect US Treas-uries to experience a negative fund flow in 2010. Long-term inflationary risk will also ham-per longer-duration US Treas-ury products.

Default risk for investment-grade and high-yield bonds has subsided and we expect fewer downgrades in 2010 as the economy rebounds, business conditions improve and corpo-rate fundamentals stabilize.

The emerging markets remain the most attractive foreign bond market. Asian banks have been the most successful at avoiding losses from financial asset write-downs. There contin-ues to be some risk in the Euro-pean financial sector for future balance sheet impairment. Risk appetite for less than credit worthy regions will increase in 2010, which should also drive funds into emerging market fixed income assets. Peak Financial Team
Pran Tiku
Luisa Pandolfi
Kerry Luria
Alla Trachtenberg
Neel Tiku
Shana Orczyk
281 Winter Street
Suite 160
Waltham, MA
Phone: (781) 487-9500
Fax: (781) 487-9501
E-mail: contact@peak-financial.com

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