US Fixed Income Markets Weekly: The European crisis appears to be stabilizing, but is leaving fiscal tightening

· US Fixed Income Markets Weekly: The European crisis appears to be stabilizing, but is leaving fiscal tightening, looser (for longer) monetary policy, and lower growth and inflation expectations in its wake. Low inflation, a low-for-long Fed, and decent GDP growth are a combination of factors that is quite supportive of spread product over the medium term especially given the supply/demand outlook-we expect net supply of spread product to be flat over 2010 and muted over the next few years; the lack of supply should be supportive of spread product over the medium term. Over the near term, risk aversion and uncertainty over growth may keep spreads rangebound and volatile; stay neutral on corporates, CMBS, and ABS. Second-quarter earnings will likely be a driver of markets over the next few weeks; we expect strong results but a more cautious tone in forward-looking outlooks. Risks remain asymmetrically biased towards higher yield levels at the front end of the Treasury curve, warranting a continued underweight.