Chandler Bond Market Review

Market Summary January 2013

The economy continues to grow at a slower than desired pace. Improvement in the labor market has been modest, while trends in the manufacturing sector have been sluggish and reports on the consumer have been mixed. Payroll growth was in line with expectations in December, up 155,000, and the unemployment rate remains elevated at 7.8%. Housing data, on the other hand, has been favorable and recent reports suggest that the housing market continues to firm. Congress finally passed legislation to avert the fiscal cliff on January 1st; however, they failed to address the debt ceiling and in two months the U.S. will face the need to increase its borrowing limit. Congress is expected to resume negotiations regarding fiscal spending and sequestration as the debt ceiling nears.

Yields remain within a relatively tight range at low levels, as domestic economic growth remains slow and the outlook for the global economy remains tenuous. Rates 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.

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. The Fed said it will purchase longer-term Treasuries at a pace of $45 billion per month for an unspecified period of time beginning this month. This program essentially replaces “Operation Twist” which expired 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 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%. Overall, the Federal Reserve continues to pursue aggressive stimulus programs, and is forecasting slightly faster economic growth this year and a gradual decline in unemployment.

Treasury Yields January 2013

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and views constitute judgments or relevant information as of the date of writing and such information may become outdated or superseded at any time without notice.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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