Chandler Bond Market Review

Market Summary February 2013

Recent data suggests that first quarter economic growth is off to a slow start. Improvement in the labor market remained modest in January, with payrolls advancing just 157,000, and the unemployment rate edged up slightly to 7.9% from 7.8% in December. Manufacturing trends appear to have picked up slightly in January with a better than expected ISM manufacturing report. Meanwhile, higher payroll taxes, rising gas prices and uncertainty about the government’s fiscal policy appears to be weighing on consumers. Housing data has remained mostly favorable, though lack of supply seems to be tempering sales volume. Government budget and spending issues remain largely unresolved. On February 4th, the President approved a bill to temporarily suspend the debt limit, giving lawmakers until mid-April to pass a budget or have their pay withheld.

Yields remained within a relatively tight range at low levels in January due to the Federal Reserve’s accommodative monetary policy and continued European sovereign debt risk.

The Federal Open Market Committee left policy rates unchanged at its first meeting of the year on January 29th and 30th. The Committee will continue with quantitative easing, buying longer term Treasuries at a pace of $45 billion per month and agency mortgage-backed securities at a pace of $40 billion per month. The Fed has stated that an exceptionally low fed funds rate will be maintained as long as unemployment remains above 6.5% or until inflation looks set to exceed 2.5%. The Fed noted that growth in economic activity had recently weakened, but attributed it primarily to weather-related and other “transitory factors”. The FOMC’s statement indicated that “although strains in global financial markets have eased somewhat, the Committee continues to see downside risks to the economic outlook”, which likely refers to ongoing uncertainty about fiscal policy in the US and abroad.

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and views constitute judgments or relevant information as of the date of writing and such information may become outdated or superseded at any time without notice.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