Chandler Bond Market Review

Market Summary May 2013

Recent economic data has been somewhat lackluster, although job growth was better than expected in April.  Nonfarm payrolls rose 165,000 in the month, exceeding the consensus forecast of 153,000.  The net revisions in nonfarm payrolls for February and March were up 114,000. Average nonfarm payroll growth for the first four months of this year has been 195,000 per month.  The unemployment rate remains elevated but improved to 7.5% in April from 7.6% in March.  Meanwhile, recent manufacturing trends have decelerated and housing trends may have lost some momentum after a relatively strong start to the year.  Consumer spending has held up pretty well in spite of this year’s increase in payroll taxes, but trends may be softening.  Overall, the economy is not showing much positive momentum, which may suggest that the impact of fiscal tightening has begun to trickle through the economy. 

 Yields declined in April, reflecting weaker than expected economic data.  Yields also continue to be influenced by the Fed’s accommodative monetary policy.

 The Federal Open Market Committee left policy rates unchanged at its April 30-May 1 meeting, as expected.  The Fed noted that the economy continues to grow at a moderate pace, but cautioned that fiscal policy has been restraining growth.  The Fed also highlighted that the housing market has continued to strengthen, while the labor market has also shown some improvement, though unemployment remains unfavorably high.  The Fed will continue to purchase mortgage-backed securities at a pace of $40 billion per month and longer-term Treasury securities at a pace of $45 billion per month.  However, for the first time, the Fed officially stated that it may increase or reduce the pace of its asset purchases, depending on the outlook for the labor market and inflation.  With the core inflation rate at just 1.9% in March (well below the Fed’s trigger rate for policy action of 2.5%), we believe the Fed’s current focus is primarily on growth. 

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and views constitute judgments or relevant information as of the date of writing and such information may become outdated or superseded at any time without notice.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