Chandler Bond Market Review

Market Summary July 2012

Treasury rates moved slightly higher in June in spite of disappointing economic data, ongoing concerns about Europe’s sovereign debt crisis, and the extension of Operation Twist.  The markets are trading in a tight range despite market speculation that additional measures to stimulate economic growth from global central banks may be forthcoming.  Despite the small back-up in rates between May 31st and June 30th, the overall supply of high quality sovereign debt has continued to decrease as the European financial crisis has escalated, which will continue to support U.S. Treasury market valuations.

The domestic economy has slowed and we believe downside risks remain. Uncertainty regarding an ultimate resolution of the European debt crisis continues to create significant volatility in the financial markets, and concerns about the U.S. reaching a “fiscal cliff” have grown here in the U.S.   Domestic economic data continued to be mostly disappointing in June, with the exception of some mildly better than expected housing market data.  The past four U.S. non-farm payroll reports have been weaker than expected.  In June, the economy added just 80,000 jobs, below the consensus forecast of 90,000. The unemployment rate also remained elevated and unchanged at 8.2%.  Consumer confidence has recently declined and retail sales trends have weakened.  Manufacturing trends have also slowed, according to the most recent ISM manufacturing index report.  While we still expect positive U.S. GDP growth over the next few quarters, we believe growth is likely to be quite sluggish.

Monetary policy in the United States remains very accommodative with assurance from the Federal Reserve that the fed funds rate will remain exceptionally low through late 2014.  In June, the Federal Open Market Committee left policy rates unchanged at a range of 0-0.25% and acknowledged that the economy has slowed.  The FOMC also announced that it would extend Operation Twist (which was supposed to expire at the end of June) through the end of the year.  FOMC participants expect modest improvement in the economy in upcoming quarters, but nonetheless downgraded their economic forecasts at the most recent FOMC meeting as the Fed sees significant downside risks to the outlook. Inflation has declined and the Fed believes longer-term inflation expectations are stable.  The Fed cut it’s expectations for GDP growth for 2012 to a range of 1.9%-2.4% (from its previous forecast of 2.4%-2.9%), and for 2013 to 2.2%-2.8% (from its previous forecast of 2.7%-3.1%).  The Fed is now projecting an unemployment rate of 8.0%-8.2% for 2012, and 7.5%-8.0% in 2013.

Treasury Yields July 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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