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World’s credit markets continued to rally in third quarter
With continued signs of global economic stabilization and cash rates close to zero, riskier fixed-income sectors remained attractive, as high-yield, emerging-market debt and investment-grade corporate bonds delivered solid performance. Throughout the third quarter, most global central banks maintained accommodative monetary policies. Only the Bank of Israel raised rates. Investors responded favorably to the idea that easy monetary and fiscal policies would remain in place long enough to spur growth and impede deflationary pressure. Yields on developed market foreign government bonds declined and the U.S. dollar lost value against most currencies. Oil prices moved higher, reflecting the belief that the worst of the decline in global demand may have passed.
In this environment, Columbia International Bond Fund underperformed the Citigroup Non-U.S. World Government Bond Index-Unhedged.
Currency exposure hampered return; emerging debt helped 1
The fund had less exposure to foreign currencies, in general, and to the yen and euro, in particular. With the exception of the British pound, most currencies rose against the U.S. dollar. However, the fund’s exposure to emerging market debt contributed positively to total return, as spreads continued to narrow in the third quarter.
Looking ahead
We expect growth in major industrialized economies to remain weak through the end of 2009. Many governments have stepped in to bail out their banking systems. Fiscal deficits are expected to rise. Although the rise in commodity prices from the lows posted in 2008 continued to support emerging market bonds in the third quarter, solid evidence of a rebound in global demand is needed to sustain the rally in emerging market debt going forward. Economic growth and foreign exchange reserve accumulation are slowing, while fiscal balances and overall debt dynamics remain at risk of deteriorating. Reform momentum in emerging market countries is absent. Inflation pressures in developed, as well as emerging, markets are falling on the backs of weaker global economic growth and rising unemployment. As the U.S. economy struggles amid weak consumer demand and rising unemployment, market volatility is likely to remain high. We believe that countries with stronger fiscal positions and popular or strong governments should be the outperformers for the balance of the year.
The U.S. dollar lost value against most currencies in the third quarter. However, the trend toward broad U.S. dollar weakness may be nearing an end. We believe that a stronger U.S. dollar will take hold when investors perceive a bottoming in U.S. growth and an end to the overly accommodative monetary policy in the United States.
We believe that the U.S. economy will likely lead the global economy to recovery. Until then, we do not expect U.S. yields or the U.S. dollar to rise much from current levels. Columbia International Bond Fund is positioned to take advantage of signs that the U.S. and global economies are bottoming. We expect to continue to shift the fund’s positioning with caution, in an effort to benefit from economic stabilization and recovery, as well as from an increase in investor appetite for higher-yielding assets, which we believe should continue.
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The Citigroup Non-U.S. World Government Bond Index-Unhedged is calculated on a market-weighted basis and includes all fixed-rate bonds with a remaining maturity of one year or longer and with amounts outstanding of at least the equivalent of U.S. $25 million. The index excludes floating or variable rate bonds, securities aimed principally at non-institutional investors and private placement-type securities. Indices are not available for investment and do not reflect sales charges, fees, brokerage commissions, taxes or other expenses of investing. Securities in the fund may not match those in an index.
1Determinations of contributors and detractors are based on performance relative to the fund’s benchmark.
Since economic and market conditions change frequently, there can be no assurance that the trends described here will continue or that the forecasts will come to pass. The views and opinions expressed are those of the portfolio managers and analysts of the affiliated advisors of Columbia Management Group, are subject to change without notice at any time, may not come to pass and may differ from views expressed by other Columbia Management associates or other divisions of Bank of America. These materials are provided for informational purposes only and should not be used or construed as a recommendation of any security or sector.
There is no assurance that any securities discussed herein will remain in an account’s portfolio at the time you receive this report or that securities sold have not been repurchased. It should not be assumed that any securities transactions or holdings discussed were or will prove to be profitable, or that the investment recommendations or decisions made in the future will be profitable or will equal the investment performance of the securities discussed herein.
Columbia Management Group, LLC (“Columbia Management”) is the investment management division of Bank of America Corporation. Columbia Management entities furnish investment management services and products for institutional and individual investors. Columbia Funds are distributed by Columbia Management Distributors, Inc., member FINRA and SIPC. Columbia Management Distributors, Inc. is part of Columbia Management and an affiliate of Bank of America Corporation. |