Chandler Bond Market Review

November 2011 Market Summary

Treasury yields remain at compressed levels but nonetheless bounced higher on a month over month basis as equity markets rallied to start the 4th quarter of 2011. Operation Twist continues to have a large influence on prices for longer-term Treasury securities. Concerns about debt issues in the euro zone remain a key issue and have been the primary driver of market movements over the past few months.

Recent domestic economic data has improved slightly, helping to calm some fears that another U.S. recession might be near. The three-month moving average of non-farm payrolls is 114k, not enough to bring down the unemployment rate of 9.0%, but yet not weak enough to cause a material downdraft in economic growth. In our view, domestic economic data remains indicative of a slow growth environment. However, political turmoil related to the sovereign debt crisis in Europe has heavily influenced the day-to-day movement in global equity and bond markets and largely overshadowed any positive or negative economic news out of Asia or the United States. The sovereign crisis in Europe has spread with concerns shifting from Greece to Italy, where borrowing costs have jumped sharply. Some market participants are concerned that a severe contraction in the European economy could derail the already fragile U.S. economic recovery. We continue to believe the U.S. economy will muddle along at a slow pace, but an escalation of the crisis in Europe could alter our view.

In early November, the Fed announced it would keep its Fed funds target rate unchanged at 0%-0.25% and expects to keep the rate exceptionally low through mid-2013. The Fed will also continue to engage in “Operation Twist” by extending the average maturity of its Treasuries purchases. This program is intended to put downward pressure on longer-term interest rates. The Fed expects a modest pace of economic growth in coming quarters, but noted, “there are significant downside risks” to the current economic environment. The Fed slightly lowered its outlook for economic growth in 2012 and 2013, and now expects the economy to expand by about 2.7% in 2012, 3.3% in 2013. The next regularly scheduled FOMC meeting is December 13.

Treasury Yields November 2011


This report is provided for general information purposes only and should not be construed as specific legal, tax, or financial planning advice. All opinions and views constitute judgments or relevant information as of the date of writing and such information may become outdated or superseded at any time without notice. This report is not intended to constitute an offer, solicitation, recommendation or advice regarding any securities or investment strategy. This information should not be regarded by recipients as a substitute for the exercise of their own judgment. Fixed income investments are subject to interest, credit, and market risk. Interest rate risk: the value of fixed income investments will decline as interest rates rise. Credit risk: the possibility that the borrower may not be able to repay interest and principal. Low rated bonds generally have to pay higher interest rates to attract investors willing to take on greater risk. Market risk: the bond market in general could decline due to economic conditions,especially during periods of rising interest rates.

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