Chandler Bond Market Review

Market Summary February 2014

Recent economic data has been somewhat lackluster, and perhaps unfavorable winter weather has been at least partially to blame, but we believe the economy continues to grow at a slow pace. Nonfarm payroll jobs grew just 113,000 in January, versus expectations of 180,000. Private payrolls grew by 142,000 in January while government jobs contracted by 29,000. Though the January employment report was disappointing, some of the details in the report were favorable. Wage growth rose 0.2% in the month, as expected. The unemployment rate dropped to 6.6% in January from 6.7% in December, while the labor force expanded from a historically low level in December. Meanwhile, manufacturing, housing, and consumer data has been mixed. Overall, we believe the economy continues to be on a slow growth trajectory fueled by modest improvement in the labor market.

At its January 28-29 meeting, the FOMC announced that it would continue to taper its asset purchases in February by another $10 billion, as expected. The Fed continues to purchase MBSs at a pace of $30 billion per month and longer-term Treasuries at a pace of $35 billion per month. The path toward winding down quantitative easing continues to be data dependent, and we believe the process of unwinding will likely continue at a steady pace throughout 2014. The January FOMC statement indicated that “growth in economic activity picked up in recent quarters” but it was also noted that unemployment remains elevated and that persistently low inflation could pose risks to the economy. The Fed continues to emphasize that the fed funds target rate is expected to remain low well past when unemployment falls below 6.5%. Notably, Janet Yellen officially took over as Fed chair on February 1.

Treasury yields have continued to be somewhat volatile, as market participants have reacted to economic data and speculation about the pace of the Federal Reserve’s tapering of asset purchases. More recently, fears about emerging markets and the subsequent flight to quality has been offsetting to the upward pressure on rates caused by Fed tapering.

 Yield Curve

 

 

 

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and views constitute judgments or relevant information as of the date of writing and such information may become outdated or superseded at any time without notice.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