Issue selection and sub-sector rotations key to positive returns

Despite the significant gains generated in bond markets in 2009, we believe the case for corporate bonds remains strong.

Their valuations remain attractive by historical standards, credit fundamentals remained relatively robust during the crisis and are now improving and the global economy is recovering. However, we believe valuations are no longer compelling across the board and issue selection and sub-sector rotation are becoming increasingly important. Economic data continues to signal improving conditions and we would not be surprised to see a few quarters of above-average growth in the first half of 2010, particularly in the US, but we remain suspicious about the durability of the recovery past 2010. ...