Thankfully this week’s global economic calendar was light allowing markets a chance to consolidate.The last few weeks’ stock market correction has been in reaction to a barrage of gloomy economic reports with most risk markets trending down on the bad news trifecta of stubbornly high unemployment, weaker manufacturing and falling home prices with little hope in sight.Responding to the latest data, Fed chairman Ben Bernanke delivered a speech in Atlanta last Tuesday declaring: “Until we see a sustained period of stronger job creation, we cannot consider the recovery to be truly established.”Now all eyes are on the end of the QE2, or the Fed’s planned exit on June 30 from buying $600 billion of assets in the open market. QE2 followed QE1 where the Fed absorbed over $1 trillion in mostly mortgage-backed securities from the last part of 2008 and through the spring of 2010.Up until the latest data series it was generally presumed that a withdrawal of stimulus from the system on the back of a gradually improving economy would result in higher interest rates.However, now with statistics veering to the downside, economists have been lowering global growth rate assumptions leading some to speculate that the next Fed move would be another massive round of stimulus. Renewed talk of extending the asset buying programmes led to rumours of a new ‘QE Lite’ program or even QE3.And yet vocal FOMC members are already panning the idea leading us to believe that another major Fed programme is unlikely. As Philadelphia Fed President, Charles Plosser commented this week: “There probably won’t be a third round of quantitative easing, but the Fed is still likely to keep monetary policy accommodative for longer.”Part of the concern is that if the Fed stops buying Treasuries and other assets directly, the extra supply of debt combined with a major buyer stepping away will lead to a dramatic increase in interest rates possibly plunge the fragile recovery back into another recession.While a spike in interest rates after the end of QE2 is possible, we do not see this outcome as the most probable. For one, history shows a different outcome.Looking back to the end of QE1 in March of last year through the beginning of the latest Fed buying binge, QE2 commencing this past November, the yield on the 10 year US government bond actually fell by over one percent. Of course, euro zone troubles and a related ‘flight to safety’ helped but nevertheless buyers showed up in earnest at the Treasury auctions and drove rates down without the help of the central bank. Secondly, if the Fed gradually removes stimulus, the economy is more likely to keep stumbling and thereby keep a lid on inflation. Lower core inflation rates will prompt bond investors to bid on fixed income securities and hold rates low.Looking ahead, we see interest rates remaining in a trading range with bond prices moving up and down in reaction to the ebb and flow of the consensus global growth outlook. Right now, the data appear weak which could lead to the ten year yields (presently 2.97 percent) falling below 2.9 percent in the next few weeks.However, a few potential legs of growth momentum still remain. Importantly, the recently reported economic growth numbers are backwards looking and inclusive of events which have since reversed.The Japanese earthquakes and mid-Western tornados have come and gone while the related supply disruptions are being worked out. At the same time commodity prices have stabilised; even oil prices are ten percent lower than a month ago. Any signs of life in global growth prospects are should push yields back up to the higher end of a range which we assume to be about 3.25 percent. Realistically we expect most fixed income securities will ‘earn the coupon’ over the summer months with bond returns more dependent upon current income yields than market price action.Bryan Dooley, CFA serves as portfolio manager for LOM Asset Management. He is responsible for investment performance on large discretionary portfolios including the Morningstar 5-star rated LOM Fixed Income Fund. Contact him at Bryan.dooley[AT]lom.com or on 294-7032.This commentary is for information purposes only. It is not intended as an offer or solicitation for the purchase or sale of any financial instrument, investment product or service. The information contained herein, has been compiled from sources believed to be reliable, but no representation or warrant, express or implied , is made by Lines Overseas Management Ltd or any of its affiliates or representatives, as to its accuracy, completeness or correctness. Readers should consult with their investment adviser if such information and or opinions would be in their best interest when making investment decisions. LOM is licensed to conduct investment business by the Bermuda Monetary Authority.