Chandler Bond Market Review

Market Summary December 2012

The treasury yield curve declined slightly in November. Yields have remained within a tight range at low levels, as uncertainties about the domestic and global economy persist. Rates also continue to be influenced by the Federal Reserve’s accommodative monetary policy, continued purchase of securities onto their balance sheet, and their desire to keep interest rates contained. In the U.S., concerns about the fiscal cliff have escalated as budget negotiations continue. Meanwhile, Europe’s economy remains troubled. Though the region has made strides toward containing its sovereign debt crisis, including measures to reduce Greece’s debt burden, concerns about political turmoil in Italy have recently begun to weigh on markets.

Domestic economic growth remains sub-par. Improvement in the labor market has been modest at best, while trends in the manufacturing sector have been sluggish and reports on the consumer have been mixed. Payroll growth was better than expected but modest in November, up 146,000, and the unemployment rate remained elevated at 7.7%. Housing data, on the other hand, has been favorable and recent reports suggest that the housing market continues to firm.

The Federal Open Market Committee left policy rates unchanged at its December meeting at a target range of 0%-0.25%, and announced a plan to implement additional quantitative easing. As market participants expected, the Fed said it will purchase longer-term Treasuries at a pace of $45 billion per month for an unspecified period of time, after “Operation Twist” (the current bond-buying program of roughly the same size) expires at the end of December. The Fed also said that it will continue to purchase additional agency mortgage-backed securities at a pace of $40 billion per month, for an open-ended period of time. The Fed’s guidance for policy rates is now linked to economic markers rather than a timing target. Specifically, the Fed said that an exceptionally low fed funds rate will be appropriate as long as unemployment remains above 6.5% or until inflation looks set to exceed 2.5%. The Committee had previously indicated that the fed funds rate would remain at an exceptionally low level through at least mid-2015. Overall, the Federal Reserve continues to pursue aggressive stimulus programs, and is forecasting slightly faster economic growth next year and a gradual decline in unemployment.

Treasury Yields December 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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