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Credit and Fixed Income
30 January 2010
Philip Barleggs
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Global Economic Outlook
Growth
Strong growth, with variations
The global economy will probably experience strong growth in the first half
2010. Asia is set to shine while the major economies will be held back by
muted consumption growth
Inflation
Inflation in range
The significant excess capacity around the world should lead core inflation
to decline until mid-year. Headline inflation has been rising because of
commodity prices but is not expected to overshoot
Policy
Removal of policy support
Fiscal policy is becoming less supportive. And monetary policy is being
effectively tightened as quantitative easing (QE) ends. We expect policy
rates in the G4 to remain unchanged in 2010
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Growth Outlook – US
Leading Indicators Point to Strong Growth in the US but
questions remain about sustainability
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Growth Outlook – Europe
Sentiment suggests softer recovery in Europe
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Inflation Outlook
Large Output Gap should act as a Drag on Core Inflation
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Credit Outlook
Supportive Drivers
Economic Recovery & Stimulus packages
De-leveraging continues, fundamental improve
Comparative position versus Sovereigns improving
Investment inflows
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Credit Outlook
Risk Factors
Sovereign debt crisis deepens
How overweight are investors already?
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Global Government Bond Strategy
Yield Level
Gradually higher yields
Economic growth, large government deficits, and the prospect of rate hikes
will probably lead to gradually higher yields
Curve
Curve to flatten - eventually
We expect curves to remain very steep for several months before flattening
when investors start pricing in upcoming rate hikes
Inflation
Breakeven inflation attractive in the USA, too high in Europe
For US bond investors, TIPS are an attractive insurance policy against
higher-than-expected inflation. We prefer nominals in the UK and in the
Eurozone
Swap Spreads
Swap spreads to tighten
We expect swap spreads to tighten, except for US swap spreads as their
directionality to yields leave them vulnerable to a correction in bonds
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Global Credit Strategy
Yield levels
Superior yield on corporates provides comfortable break-even levels
Flat spread curve enables capture of risk premiums at short maturities
Spreads
Spread tightening is supported by improving fundamentals
Compression between rating bands has further to go
Overweight
Corporate bonds
Economic recovery on track
Valuations attractive
Asset allocation inflows expected
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Macro Themes for 2010
Central Banks – Lower for longer
Asset Reflation – Substantial cash reserves put to work
Focus Turns to Fundamental Data – Scaling back of official intervention
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Investment Themes for 2010
Higher Yields
Narrower Credit Spreads
Lower Volatility
Inflation: Is it Cheap?
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