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Wednesday, August 16, 2006

Fixed Income Investing- Global Bond Outlook

By Yaser Anwar, CSC of Equity Investment Ideas

Monetary tightening in the major countries has often come to an end shortly after the Fed goes on hold. The major exceptions were '85-86 & '89-90.

However, some foreign central banks were forced to continue tightening in these episodes because of either sharply accelerating inflation, U.K. & Australia, or because of massive fiscal stimulus, such as German reunification. These conditions are not in place today.

The ECB and BoJ are unlikely to cut rates any time soon, but they are likely to put interest rate on hold for a while as the U.S. economy decelerates. Interest rate expectations in Europe and Japan have room to decline during this phase, allowing their bond markets to join the global rally fueled by global monetary tightening.

With global monetary tightening & gradual slowdown in the U.S. economy, have led me to align my portfolio with a portion in long term global bond yields, which will follow the U.S. when the rally gets underway.

Hence, long term global bond yields will follow the U.S. when the rally gets underway although U.S. Treasuries will outperform due to higher short-term lending rates being higher than most Europe & Asia.

However, If you want to be in foreign treasuries, make sure you hedge your bets with Euro vs Dollar, the Euro Currency Trust ETF (FXE), as Euro raises rates, FXE will get stronger thus eroding your US$ value.

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