GLOBAL - Fixed-income managers are warning credit markets will continue to be volatile at least until the second quarter of this year as there is still concern about liquidity, suggests a study conducted by Standard & Poor's.

The ratings agency interviewed over 100 managers of European fixed-income funds in an annual review of the sector and found managers were more bearish in December about the uncertainty and lack of credit liquidity than they had been in October.

Kate Hollis, lead analyst at S&P Fund Services, described 2007 and the impact of the summer credit crunch as "a year of two halves", and said details of the study revealed "some managers, most notably Pimco, believed that the credit turmoil would spill over into the real economy and trigger a global slowdown" though added asset houses do not necessarily believe it will lead to a global recession.

More specifically, she noted some fund managers had called the market correctly and in some cases anticipated problems but conditions within the asset-backed debt space left houses "frustrated" because conditions in the market meant they were forced to sell other assets and lost money through this execution.

The one strong area within this arena was convertible bonds, and to be expected said Hollis, given their close proximity to the equities sector.

So an investment-grade bond fund from London-based credit boutique BlueBay Asset Management was the only one in its eurozone fixed-income peer group to outperform its benchmark "appreciably" in the first and third quarters of 2007, according to Hollis, and despite it being a corporate bond fund.

Her analysis of the fund reveals BlueBay achieved this by cautious on credit in the first half of the year, and being overweight subordinated financials and underweight industrial. Officials at the firm sold most of their holdings in June and held 65% Bunds by the end of June, reduced their credit again in mid-August via iTraxx swaps and selectively bought new issues in September.

"As a result, the fund outperformed its benchmark by about 50bps gross in the first half and 284bp gross for the first three quarters of 2007," she added.

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