Bond Market Review

Monthly review by Rick Kilbride, head of ING Fixed Income Managed Accounts

• F.I.R.S.T.: Here We Go Again
  F.I.R.S.T.: The Fed, having just met and announced its refreshed outlook, forecasts a moderate pickup in growth and stable inflation.
• F.I.R.S.T.: Scary Stuff and Other Things Easy to Hate
  F.I.R.S.T.: Don’t get scared of bonds; there are still too many other problems for them to hurt you.
• F.I.R.S.T.: Never Mind Italy, Got Gas?
  F.I.R.S.T.: Bond markets continue to perform well, particularly the credit markets.
• F.I.R.S.T.: Watching From Our Foxhole
  F.I.R.S.T.: Fixed income had a great January as credit tightened and interest rates remained stable. But we still seek resolution to many substantial concerns.
• F.I.R.S.T.: A Race to Zero
  F.I.R.S.T.: Low growth and low rates for the period ahead. Seek stable income vehicles. Monitor vigilantly.
• F.I.R.S.T.: Is This Trick or Treat?
  F.I.R.S.T.: I can't remember a time when the outlook has been more uncertain.
• F.I.R.S.T.: Les Misérables and Fat Tails
  F.I.R.S.T.: Our market view is that the global outlook will remain ‘challenged’ at best.
• F.I.R.S.T.: An Earthquake and Hurricane in Bond Land
  F.I.R.S.T.: The bond market has been volatile, but hang on.
• F.I.R.S.T.: Living in Fantasy: Political Train Wreck Is Just a Bump in Weak Trend Growth
  F.I.R.S.T.: The weak trend growth environment dominates the market outlook.
• F.I.R.S.T.: The Trades to Get Right
  F.I.R.S.T.: In these volatile times, watch monetary policy, China’s growth, oil prices and government fiscal solutions for signals of market direction.
• F.I.R.S.T.: QE2 Sails Away
  F.I.R.S.T.: House prices are mostly a vote of confidence in the outlook for one’s own wages.
• F.I.R.S.T.: Ben Tells Us Not to sell Our Bonds
  F.I.R.S.T.: The Fed is in absolutely no hurry at all to tighten monetary policy.
• F.I.R.S.T.: The Disconnect on Inflation
  F.I.R.S.T.: With a disappointing recovery, the Fed may have to address the communication disconnect around inflation expectations, instead of actually taking steps to mitigate this threat.
• F.I.R.S.T.: How To Think About Oil
  F.I.R.S.T.: Global unrest has oil prices moving higher. Financial markets are right to be concerned about an energy-induced slowing of the economy.
• F.I.R.S.T.: The Long Climb Back
  F.I.R.S.T. The output gap is daunting, add slow job growth and both inflation and the Fed are out of play for some time.
• F.I.R.S.T.: 2010 Buzz Kill and 2011 Tug of War
  Forecasts that are strictly one direction are likely to be wrong. More likely we’ll see movement in both directions.
• F.I.R.S.T.: Check Engine Light
  F.I.R.S.T. The strongest props for bonds, inflation and Fed policy, remain supportive into 2011.
• F.I.R.S.T.: A Tapestry of Rich and Royal Hue
  F.I.R.S.T. There is a rich hue of global under-currents. With inflation low, growth elusive and the Fed joining the Chinese buying our bonds, hold on to yours.
• F.I.R.S.T.: Is Another QE2 Launch Necessary?
  F.I.R.S.T.: More quantitative easing is probably going to happen, but it’s not the right medicine for what ails us.
• F.I.R.S.T.: Quick, Think of Something, Anything
  F.I.R.S.T.: They’re making monetary policy do all the work, and it isn’t working.
• F.I.R.S.T.: Fighting Over the Forecast
  F.I.R.S.T. As the data has come in on the anemic side, the dispute has moved from whether or not to do anything, to a discussion of what actually to do.
• F.I.R.S.T.: "It Won't Feel Terrific"
  F.I.R.S.T. Stubbornly high unemployment, prolonged weakness in housing and deleveraging conspire to hold interest rates lower for longer.
• F.I.R.S.T.: Deficits, Deceleration, Deflation and the Who
  F.I.R.S.T. Interest rates don’t move higher as budget deficits, economic deceleration and disinflationary forces work their course.
• F.I.R.S.T.: Spreading Greece Fire
  F.I.R.S.T. Greece doesn’t want to be rescued. Europe doesn’t want to rescue Greece. It’s a perfect match!
• F.I.R.S.T.: Is That All You Get for Your Money?
  F.I.R.S.T. Investors often call attention to the decades-long downward movement in real interest rates and claim that there are limited prospects for this trend to continue. This conveniently ignores that we are still in a weak recovery as well as asset allocation needs for income.
• F.I.R.S.T.: The Concern About Rates
  F.I.R.S.T. A year ago we were amidst the worst of the economic and market conditions. The economy is expanding again, and the important question is if the recovery process is to the point where we might witness self-sustaining growth.
• F.I.R.S.T.: Awaiting the Breakout
  F.I.R.S.T. Something has to give, but whatever it is, it probably won’t happen right away. Such instant gratification isn’t the way of the markets. A more drawn out and painful waiting process is more typically required.
• F.I.R.S.T.: While We Wait, Bleak Days for the Fed
  F.I.R.S.T. President Obama’s reappointment of Ben Bernanke to lead the Federal Reserve, announced last summer, was viewed as much as support for the chairman’s efforts as it was a desire not to change economic leadership in the midst of the fallout from the credit crisis.
• F.I.R.S.T.: How Do We Cover the Exits?
  F.I.R.S.T. Our great recession — 18 months’ worth — has ended, and risk markets have roared back. At some point, accommodations will be unwound, though it is too soon to call for a change in monetary policy. The risk is that economic recovery may not match the market recovery.
• F.I.R.S.T.: A Long Slog to Fix Unemployment
  F.I.R.S.T. Sometimes investors are right for the wrong reasons. We were apprehensive about credit in 2008. Underlying this were concerns about the dollar, the sustainability of the triple deficits (current account, trade and federal budget) and the associated interest of foreigners in continuing to take the other side of these situations. This was the heart of our apprehension, and we positioned accordingly. A global economic and credit crisis followed, worse than anything we expected. Yet we didn’t anticipate that it would be financial institutions’ leveraged positions in triple-A rated mortgages that would ignite it.
• F.I.R.S.T.: Policy and Inflation
  F.I.R.S.T. Bond markets have been trading within wellestablished ranges for some time. Interest rates are below June peaks, though longer rates are much higher than they were at year end. All categories of risky assets have done well in recent months and have thus far held on to their gains.
• F.I.R.S.T.: When Does It Get Better?
  F.I.R.S.T. To judge by the price action in credit markets, happy days are indeed here again. The yield advantage of credit, compared with Treasuries, has narrowed relentlessly this year; investors are scrambling to invest cash, gorging to satisfy their newfound appetite for risk.
• F.I.R.S.T.: Less Bad Isn’t Good Enough
  F.I.R.S.T. The shifting of the consensus view on rates, which permitted them to move lower, has likely been the result of continued anemic inflation data as well as the unexpected and extraordinary demand that has met the Treasury’s new debt issuance. The auctions have gone quite well. Also giving a bid to rates is that tangible signs of economic improvement have remained elusive. Economic data stopped getting worse, but isn’t exactly getting better.
• F.I.R.S.T.: Exit Strategies for Banks and Government
  F.I.R.S.T. Some of the recent increase in longer-term interest rates is due to a reversal of the enormous flight-to quality that occurred at the end of 2008 as the “world is coming to an end” mindset of the time is not being borne out. At the same time, the process of digging out from this recessionary period will take more time than the few green shoots observed so far might lead us to believe.
• F.I.R.S.T.: Have You Survived Your Stress Test?
  F.I.R.S.T. While I write, the results of the stress tests designed for our banks have been leaking out at a disconcerting rate. As you read this, the results are probably clearer, though the design and stringency of the tests themselves may never be.
• F.I.R.S.T.: Reality Bites as Economic Resignation Sets In
  F.I.R.S.T. Bleak deterioration, on what appears to be all fronts and on global scale, is the sad state of the economy today. In the United States, the primary questions are “what will get us moving?” and “how long will it take?” The questions relate to the consumer and the banking sector, and to economic health in general.
• F.I.R.S.T.: Separating Hearts from Minds
  F.I.R.S.T. None of this is getting easier. Market participants trudge to work this winter with real and burdensome anxieties. It’s like we are all carrying around big bags of bricks that weigh us down. Do we still have a job? Do our colleagues?
• F.I.R.S.T.: - 2008: Good Riddance
  F.I.R.S.T. - It’s an old cliché that what doesn’t kill you makes you stronger. We got through that mess! Now for the spoils! While portfolio managers are congenitally biased to be bullish on their own sectors, please grant me a bit of forbearance as I point out some opportunities. 2009 is likely to be very different sort of experience.
• F.I.R.S.T.: - Yes Virginia, There is a Recession
  F.I.R.S.T. - These guys are good, Bernanke, Paulson, and the rest. They are smart and they know their history.