Chandler Bond Market Review

Market Summary December 2013

There has been a stream of positive economic data in recent weeks. Job growth was stronger than expected in November, and the unemployment rate dropped to 7.0% from 7.3%. Nonfarm payrolls increased 203,000 in November exceeding the consensus forecast of 180,000. Average nonfarm payroll growth over the past 3 months has been about 193,000 per month. Overall, the labor market is showing moderate improvement. Meanwhile, manufacturing data has been mixed, but one of the most closely watched indicators (the ISM manufacturing index) suggests that the manufacturing sector is expanding at a healthy pace. Some of the most recent housing data, such as new home sales and housing permits, have also been favorable. The index of leading economic indicators (LEI) also continues to point to modest economic growth.

The recent improvement in economic data will likely intensify the Fed’s discussion about tapering its bond purchases. However, we don’t expect the Fed to announce tapering at the upcoming December 17-18 FOMC meeting. We continue to believe that uncertainty about the country’s longer-term fiscal policy will delay the unwinding of quantitative easing until 2014. The bigger unknowns at this point are the composition of the taper (mortgage-backed securities vs. Treasuries), the overall size of the taper (we estimate that the Fed will initially trim their purchases by about $10 billion), and the tone of the Fed’s message about the overall trajectory of the economy and monetary policy.

Treasury yields have continued to be somewhat volatile, as the outlook on Fed policy and long-term fiscal policy remains uncertain.

Market Summary

 

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and views constitute judgments or relevant information as of the date of writing and such information may become outdated or superseded at any time without notice.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