Government bond Markets: Shaw Capital Management February Newsletter:

Government bond markets have ended 2009 on a very disappointing note. A further improvement in sentiment about the prospects for the global economic recovery, and indications that some central banks might be preparing to introduce early "exit strategies" from the measures that had been introduced to counter the recession, have been important factors in producing a more cautious attitude amongst bond investors. But a further significant consideration towards year-end has been the fear of possible defaults on sovereign debts after the decision by Dubai World, a government-owned company, to seek a moratorium on the servicing of its debts, and the downgrade in the credit rating of Greece because of its deteriorating fiscal situation. Shaw Capital Management Korea February Newsletter: There was always the risk that the funding requirements resulting from recent policies, and particularly from the measures to counter the latest recession, would prove to be a massive burden for the global bond markets, and this has now proved to be the case. The Dubai government appears to have been rescued by help from Abu Dhabi; but it is still not clear whether there will be help for Greece and other periphery countries of the euro-zone that are in difficulties, and doubts have also been expressed about countries outside the euro-zone, including the UK, if central banks do not implement "exit strategies" carefully, and credible plans to reduce the massive fiscal deficits are not introduced fairly quickly. Shaw Capital Management Korea February Newsletter: There was always the risk that the funding requirements resulting from recent policies would prove to be a massive burden for the global bond markets. These doubts have already led to a significant widening of yield spreads on bonds of member countries of the euro-zone, with Greek bond yields now more than 2.5% higher than German bond yields; and even 10-year yields on US bonds and UK gilts have risen to the 4% level as investors have reduced their exposure. Shaw Capital Management Korea February Newsletter: Our position on the prospects for the bond markets remains unchanged. We still expect that the recovery in the global economy will only develop at a very slow pace, and that "exit strategies" will only be introduced very gradually. The background situation will therefore continue to provide some support for bond markets.