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By Marine Cole
After a good run in 2009, performance in bonds will be mixed in 2010, with corporate bonds continuing their rally, although at a more moderate pace. However, government and mortgage bonds will fall as the government stops some support programs, according to experts.
Rates for corporations are likely to remain about the same as this year or even drop slightly since demand from investors searching for yield will continue.
"Technical and fundamental forces suggest corporate bonds could keep running a while longer," wrote the Wall Street Journal on Thursday. Supply of new bonds from non-financial companies could fall by 30 percent in the U.S. since cash-rich corporations are expected to reduce their borrowing in 2010, according to Barclays Capital.
For banks, bonds have gained more importance as an alternative funding mechanism to issuing stock, as it allows them to lower their cost of capital.
But central banks may stop their support of low rates as they ease back on quantitative and credit easing measures. It could push yields higher on government bonds as a result.
Additionally, mortgage bonds are poised to slump as the Federal Reserve's unprecedented buying of $1.25 trillion of securities could end as soon as March, Bloomberg reported Thursday.
Such actions will also drive interest rates on new home loans up, according to analysts at BNP Paribas, Credit Suisse and J.P. Morgan Chase.
"Rising yields mean loan rates are likely to end 2010 almost 0.75 percentage point higher than they are currently, based on forecasts for government bonds and spreads, adding to challenges for a housing market struggling to recover from its worst slump since the 1930s," according to Bloomberg.
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