Fixed Income Strategies by Morningstar

Eric Jacobson, Morningstar's Director of Fixed Income Strategies, gives his take on developments in the fixed-income space.

1. What trends are you seeing in fixed income?
The 2009 theme has been a dramatic return of liquidity to fixed income markets, much of it provided or sparked by government programs both directly and indirectly putting government money into the system. In turn, that has meant a dramatic reversal for many--but not all--bond market sectors that had been badly beaten down in 2008. Many of these sectors are more fairly valued now, though, while the improving economic picture still doesn't offer significant assurance against a '"double dip" recession and/or the kinds of market effects that could hurt those sectors.

Most managers with whom we speak believe that there are still good bargains in the bond market as a result of last year's woes, but more broadly, the credit sensitive portions of the market appear to offer a lot less reward in exchange for their risks.

Those comments apply to nearly everything but Treasury bonds. By contrast, the muted economic picture and a perception that the Fed will be keeping short-term rates very low for some time to come has kept yields across the maturity spectrum relatively low. That state of affairs can easily persist for some time, and despite longer-term inflation worries, most managers aren't concerned about it becoming a problem in the near future given current levels of unemployment.

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