Chandler Bond Market Review

Market Summary March 2012

Treasury rates moved higher in February, driven by recent improvement in domestic economic data.  However, the move up was modest, as the impacts of Operation Twist as well as ongoing uncertainty about global growth, continue to keep a lid on rates.  Looking back over the past three months, the Treasury yield curve experienced a modest twist with shorter maturities rising and longer maturities falling slightly.

Domestic economic news continues to support our view that the U.S. economy is growing at a modest pace.  In February, payroll jobs grew by 227,000, better than the 204,000 boost the market was expecting. The unemployment rate remained unchanged at 8.3%. Meanwhile the manufacturing sector continues to expand, and consumer spending was relatively strong in spite of rising gas prices.  Several banks reported signs of growing loan demand in their recent quarterly results and consumer credit expanded.  In addition, the Federal Reserve indicated it will remain accommodative, which could be a tailwind for further domestic economic growth. However, the European economy remains under stress and market participants continue to be concerned about global growth trends. We believe the European Central Bank is unlikely to be as accommodative as the Fed, since the ECB has a heightened focus on promoting fiscal austerity in Greece and other weak European economies.  And, unlike the Fed, which has a dual mandate to promote employment and control inflation, the ECB has only one mandate, price stability.  Looking ahead, we anticipate that ongoing turmoil in Europe will continue to create volatility in global financial markets over the near- to intermediate-term.

Last week, the Fed announced it would retain the policy rate range of 0.0-0.25%.  The Fed provided a generally upbeat assessment of the economy and held off announcing any new forms of quantitative easing, despite market speculation the Fed might announce a new form of monetary stimulus.  There was no change to the Fed’s assurance that the fed funds rate will remain exceptionally low through late 2014.  Recent increases in gas prices were acknowledged, but the Fed expects the impact on overall inflation will be temporary.  The Fed noted that while strains on global financial markets have eased, they continue to pose a significant downside risk to the economic outlook.

Treasury Yields March 2012

RISKS AND OTHER IMPORTANT CONSIDERATIONS

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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