Sunday, August 22, 2010

J.P. Morgan-US Fixed Income Markets Weekly

US Fixed Income Markets Weekly. The weakness in economic data has caused us to revise down our outlook for growth: we now expect 1.5% and 2.0% growth in 3Q and 4Q 2010, respectively. We also expect the unemployment rate to drift higher toward 10%, implying greater risk of deflation. Worsening macro fundamentals, the Fed’s Treasury purchases, foreign demand related to a weaker dollar, and the quest for carry are all supportive of ongoing strong demand, but this is balanced by near-term duration supply risks, as low yields spark at least a refi wavelet if not a refi wave; look for intermediate yield levels to remain rangebound near current levels over the near term. We remain broadly positive on spread product, due to a combination of stabilizing financial conditions and the strong supply-demand imbalance. In CMBS and ABS, we stay overweight but favor wider-spread sectors and moving down in credit. Stay overweight MBS given strong demand and fundamental value

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