Fixed Income Markets 2010 Outlook

Fixed Income Markets 2010 Outlook – US - Despite the Fed likely being on hold, yields should drift higher as QE ends and we move closer to eventual tightening in 2011; look for 2-year yields to rise to 1.50% and 10-year Treasury yields to breach 4% by midyear. The end of the Fed purchase programs should also cause Agency debt and especially Agency MBS to cheapen; underweight Agency debt and Agency MBS and position for a wider Agency-MBSbasis. Although the end of QE is a negative, fears around supply/demand imbalances are likely overstated: total fixed income supply will remain high in 2010, dominated by Treasury issuance, but demand will likely also remain strong. We expect housing to bottom and unemployment to peak in 1Q10, which suggests bank losses and charge-offs should moderate going forward