Chandler Bond Market Review

Market Summary June 2012

Treasury rates in the long end of the yield curve moved lower in May, reflecting some disappointing domestic economic data and growing uncertainty about the global economic outlook. Inflation concerns also eased further as oil prices continued to decline in the month. In addition, Operation Twist (which expires at the end of this month) continues to put downward pressure on longer-term interest rates.

The domestic economy appears to be stumbling on its path to recovery. We believe a confluence of factors have contributed to the slowdown. Tensions in Europe have recently flared up again, just as concerns about reaching a “fiscal cliff” are rising here in the U.S. Meanwhile, we believe the recent trading loss reported by JP Morgan and the Facebook IPO fiasco have had a negative effect on sentiment in the financial markets. The past three U.S. non-farm payroll reports have been weaker than expected. In May, the economy added just 69,000 jobs, well below the consensus forecast of 150,000. The unemployment rate also rose to 8.2% from 8.1%. Fortunately, manufacturing and consumer trends appear to remain healthy, but we have become more cautious about the economic outlook. While we still expect positive GDP growth over the next few quarters, we believe growth is likely to be at the low end of prior expectations.

The Federal Reserve’s next official policy statement is due later this month on June 20th. Operation Twist, the latest iteration of monetary policy to help stimulate maximum employment and price stability, expires on June 30th. Given the aforementioned slowing economy and a more benign inflation outlook, there is increasing speculation that the Federal Reserve will announce additional measures to support economic growth in the coming months. If the Federal Reserve chooses to utilize the balance sheet again, an important element for investors to consider is whether the anticipated additional measures expand the Fed’s balance sheet or simply change the composition of the holdings. An outright increase in the size of the balance sheet is consistent with increasing the risk of inflation and hence will likely lead to higher U.S. sovereign yields if implemented.

Treasury Yields June 2012


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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