| Market Commentaries for Third Quarter, 2009 |
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 Economic Review & Outlook |
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North American economic growth likely turned positive in the third quarter of 2009, following four straight quarters of negative GDP growth. We are seeing signs of stability in the housing market, and government stimulus programs have given life to consumer spending. Capital markets continued to rally, as liquidity and the outlook for the economy improved, but the markets are likely to remain volatile in the near future.
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| High Yield Commentary |
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Following a record-breaking second quarter, the U.S. high yield market returned 14.21% for the third quarter, as reflected by the Barclays Capital U.S. High Yield 2% Issuer Capped Index. The U.S. high yield market has more than recovered its 25.88% loss in 2008, returning close to 50% year to date. We expect continued volatility in the last quarter and into 2010, as the pace of economic recovery will be slow and drawn out, and consumer activity remains constrained by unemployment and increased savings.
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| Private Fixed Income Commentary |
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We expect private debt issuance to be strong in the fourth quarter of 2009 as issuers take advantage of lower Treasury rates, lower spreads and higher investor demand. We expect new issuance to be more in the BBB ratings range, in a wider variety of sectors and from a variety of countries in the fourth quarter. Investors should continue to see attractive terms and strong covenants.
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| Investment Grade Commentary |
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The Barclays U.S. Credit Index tightened 86 basis points, providing excess return of 498 basis points for the quarter. According to Barclays, this was the second best quarterly performance ever. The best-performing industries were led by financials, and the worst were the lower-beta, higher-quality sectors. Looking toward yearend, we expect investment grade credit to outperform Treasuries, but at much more muted levels than we experienced in the last two quarters. We would expect investors to stay “closer to home” to preserve their 2009 performance.
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| Convertible Securities Commentary |
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The convertible marketplace performed very well in the third quarter, driven primarily by equity returns. Spread tightening and richening also were positive contributors as the return of risk appetite among investors continued. New issuance, at just $2.7 billion for the quarter, was disappointing but has picked up in recent weeks, and market dynamics would support larger issuance. We believe that the high level of federal deficit spending and underlying trends in housing and unemployment make a sustainable recovery unlikely in the near future. We expect increased volatility in late October or early November, which will benefit the valuation of convertibles.
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| Core Aggregate Commentary |
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The Barclays Capital U.S. Aggregate Index outperformed duration-adjusted Treasuries by 198 basis points in the third quarter, with an absolute return of 3.74%. As the economic outlook improved and cash flows into risky assets increased, risk appetites continued to increase and liquidity improved. This led to a tightening of spreads across all asset classes and positive returns relative to U.S. Treasuries. We believe that investment grade and high yield corporate bonds, along with commercial mortgage-backed securities, will continue outperforming Treasuries in the fourth quarter.
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| Market Commentaries for Second Quarter, 2009 |
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| Fixed Income Market Review & Outlook |
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Economic data began showing signs of a recovery throughout the second quarter. Growth is expected to turn positive in the second half of 2009 with a boost from inventory restocking, which was drawn down considerably in the first half of the year. Weakness continues in the housing and labor market, but consumer confidence and spending stabilized and began to turn higher. Many of these increases will likely be short lived, however, because they were spurred by one-time stimulus payments.
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| Canadian Market Review & Outlook |
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The North American economy remained weak in the second quarter, as negative real GDP and contracting employment persisted, and housing prices continued to fall. Despite these negative indicators, talk of economic “green shoots” began to sprout in market rhetoric. North American bond markets continued to sell off in the second quarter, as 10-year U.S. and Canada bond yields increased by 87 basis points (bps) to 3.53% and 58 bps to 3.36%, respectively. Government bonds suffered, as the flight to quality faded and the demand for stocks, commodities, non-government bonds and other risky assets increased.
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| High Yield Commentary |
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After finishing a very strong first quarter, the global high yield market posted solid returns again in the second quarter (24.23%), making this the best quarter in the history of the Barclays Capital Global High Yield Constrained Index. The rally that began in mid-December 2008 continued through June and resulted in a six-month return of 32.52%. April was the best month on record, when the index soared 11.47%. The market has cooled down since then, but still managed to return 7.95% for May and 3.23% for June.
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| Private Fixed Income Commentary |
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New issue volume for traditional private fixed income was approximately $5 billion for the second quarter of 2009, following a $4 billion first quarter. New issuance, with an average quality of BBB+, was distributed over a variety of stable sectors, including food and beverage, utilities, energy and government services. Spreads continued relatively wide compared to historical levels. We expect private debt issuance to accelerate in the second half of 2009, as issuers continue adjusting to the lending environment.
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| Investment Grade Commentary |
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The Barclays U.S. Credit Index turned in excess return of 1,187 basis points for the quarter, with all sectors ending on a positive note. Lower-quality BBBs have performed best, while higher-quality issues underperformed the index. We continue to take a constructive view of investment grade credit and remain confident that it will outperform Treasuries over the next six months. The magnitude of performance may be muted, however, compared to the massive outperformance in the first half of the year.
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| Convertible Securities Commentary |
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The convertible marketplace advanced from rising underlying equity prices and credit spread tightening. As consensus has shifted to a second-half recovery, investors have been quick to add risk to their portfolios. While some predict a return to normalcy later this year, it seems unlikely to us, because the employment situation is abysmal and likely to remain depressed through next year. We believe convertibles will offer investors an opportunity to benefit from expected increases in volatility and a robust issuance calendar.
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| Core Aggregate Commentary |
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The Barclays Capital U.S. Aggregate Index outperformed duration-adjusted Treasuries by 365 basis points in the second quarter, with an absolute return of 1.78%. As risk appetites increased, spreads across all asset classes tightened, leading to positive returns relative to U.S. Treasuries. We believe that investment grade and high yield corporate bonds will keep generating excess returns versus Treasuries, and securitized asset classes will continue to benefit from government-sponsored programs, though not as dramatically as they did in the second quarter.
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| Market Commentaries for First Quarter, 2009 |
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| Fixed Income Market Review & Outlook |
[+/-] summary |
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The ramifications of the financial crisis spread further into the real economy, which caused the labor market, housing, consumption, manufacturing and exports to deteriorate further. As bad as the economic data has been throughout the first quarter, the environment has shown some signs of stabilization. Our outlook calls for economic readings to remain weak in the near term, but to improve during the second half of 2009.
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| Canadian Market Review & Outlook |
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Although the economy continued to suffer in the first quarter, fixed income markets showed some signs of stability, as bond yields traded in a steady range, and corporate bond spreads tightened. Our outlook calls for economic readings to remain weak in the near term, but to improve during the second half of 2009, and we expect credit spreads to tighten through the end of 2009.
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| High Yield Commentary |
[+/-] summary |
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After a very challenging 2008 in high yield (and most asset classes), this market has posted a very strong start to 2009. We see signs that demand is coming back into the market, as evidenced by inflows in the quarter. The high yield asset class posted a return of 5.98% in the quarter, lessening the losses that gained traction early in the third quarter of 2008 and, according to Barclays Capital, resulted in 2008 returns of -26.16%.
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| Private Fixed Income Commentary |
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Approximately $4 billion of traditional private fixed income was issued in the first quarter of 2009. Volume increased markedly, compared to the $560 million of issuance in the fourth quarter of 2008. Private debt issuance should continue to increase in the second quarter of 2009, as issuers adjust to the new financial and economic environment.
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| Investment Grade Commentary |
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US credit markets got off to a strong start in January. February and March proved to be more challenging because credit markets were under pressure as equities dropped. From a fundamental perspective, we expect continued deterioration during the next six months. The pace of deterioration should begin to abate, however, as companies complete their downsizing activities to meet reduced business demand.
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| Convertible Securities Commentary |
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The first quarter of 2009 was another volatile period for the equity markets, as many concerns that plagued them in 2008 continued. The convertible marketplace improved, both in performance and issuance. We expect volatility to remain elevated over the near term but trend down over the longer term if credit markets can stabilize.
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