FIXED INCOME COMMENTARY

FIRST QUARTER, 2010

Global fixed-income markets began 2010 continuing the trend from the prior year. Interest rates remained at historically low levels, credit spreads tightened in the investment grade and high yield sectors and developing nation debt delivered extraordinary returns as the chase for yield continued. All was not calm however, as financial headlines in the first quarter were dominated by Greece and other troubled European nations (Portugal, Spain, Ireland and Italy). A threat of default from these nations was magnified by their ever worsening debt service and debt to GDP ratios. The 10 year US Treasury returned +1.15%, very similar to the developed market sovereign bonds’ return of +1.19%. The demand for higher yields resulted in the US high yield market providing a return of +3.01% while emerging market sovereign debt investors saw their holdings appreciate by 3.61% during the quarter. U.S. Treasury interest rates, as measured by the ten year maturity, declined ___ basis points during the quarter as the Federal Reserve Bank kept federal funds rate at or near the zero percent level. With inflation contained and the U.S. economy beginning to show signs of a modest recovery, the central bank’s easy monetary policy provided further support to the strengthening balance sheets of financial institutions. As the US economy started to grow, the risks of rising rates increased. However, without sustained job creation, we maintained our duration in line with the Barclay’s US Government Intermediate Index.

BUDGET DEFICITS

Source: Bloomberg

In the developed sovereign debt sector, as the quarter drew to an end, concerns mounted about the quickly deteriorating conditions in some of the continental European nations, led by Greece. Although Greece was beginning to shore up its near term cash needs with potential assistance from the European Central Bank and the International Monetary Fund, the uncertainty surrounding the timing of such aid proved quite troublesome for its debt. The markets feared that a default by Greece could lead to a domino effect in some of the other troubled countries, much the same way as the fall of Bear Stearns in 2008 led to the demise of Lehman Brothers followed quickly by Morgan Stanley seemingly coming under attack. Could there be a similar “attack” on the weak sovereigns? Should Greece fail, could Portugal be next, and if that domino falls, which nation would follow? On a risk-reward basis, we avoided any exposure to sovereign debt in Greece, Spain, Ireland and Portugal. We continue to have an underweight exposure to Italy while avoiding due to its deteriorating debt ratios.

PUBLIC DEBT AS A % OF GDP

Source: Debt/GDP Per CIA World Factbook

On a positive note, developing market debt was buoyed by several factors such as a peaceful election in Ukraine which led to increased political stability in that nation after several years. Venezuela devalued its currency and Argentina offered to settle with bondholders on $20 billion in previously defaulted debt. As a result, Ukrainian sovereign debt surged 22.3% during the quarter while Venezuela’s returned 13.1%. Developing markets delivered outstanding returns in the sovereign debt sector over the last 15 months and as a result we maintained a cautious stance with a 10% allocation to cash in lieu of being fully invested. The spreads in this sector, although still above their historic average levels, continued to tighten more rapidly relative to developed nation sovereigns. We expect to see a modest widening of the spreads in the coming quarters, with such a pull back in the market being healthy. We anticipate that such a correction will provide an opportunity to become more fully invested in the developing markets.

As we look out into the second quarter and the balance of the year, the Federal Reserve is likely to keep interest rates low until signs of improving employment emerge. Global fixed-income markets will remain fixated on Greece, specifically as a May 19, 2010 maturity approaches. We do not believe that a resolution, if there is one, will signal the end of concerns about deteriorating finances of Greece’s brethren. Should the contagion spread beyond the borders of the five European nations mentioned earlier, developed and developing nation debt is likely to come under pressure. In conclusion, caution is warranted. As such, the duration of our portfolios remains at or shorter than their respective benchmarks. Likewise, we continue to be vigilant in selecting countries whose debt we will commit capital to on behalf of our clients.

Thank you for the confidence you have placed in SeaCrest Investment Management.

This Commentary is provided to existing and prospective clients of SeaCrest Investment Management, LLC and SeaCrest Wealth Management, LLC to keep them abreast of developments within the fixed-income marketplace. It is for informational purposes only and it is not a recommendation to purchase or sell any security. We believe the information presented is reliable, but we do not guarantee its accuracy. The opinions expressed will evolve as future events unfold. SeaCrest Investment Management, LLC and SeaCrest Wealth Management, LLC are Registered Investment Advisors with the Securities and Exchange Commission.