Knowledge Center Archive


Video: January 2012 Macro Summary View

By Sean P. Simko

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Hello, my name is Sean Simko. I am head of SEI Fixed Income Portfolio Management. Today’s discussion is a recap of the market activity and performance for the month of January.

2012 commenced with expectations of stronger economic growth. January’s economic calendar showed that momentum was slowing despite pockets of strength. The first read of fourth-quarter gross domestic product showed an increase of 2.8%. Estimates for first-quarter 2012 fell to the 2.0% to 2.5% range. The labor market continues to recover, with jobless claims below the psychological 400,000 mark for most of January. The non-farm payroll report showed the addition of 243,000 jobs in January. Such gains must continue in order to push the unemployment rate lower.

The Federal Open Market Committee left its lending rate target unchanged. Its statement was nearly identical to its previous one except that the expected duration of low-interest rates was extended by approximately 18 months to late 2014. The Committee also stressed again that “strains in global financial markets pose significant downside risk to the economic outlook.” Such statements tell me that the Fed will continue to provide cheap money to help spur growth.

The Fed intends to continue buying and reallocating its holdings through Operation Twist. The Treasury market was stuck in its recent range (albeit at the upper end) prior to the Fed’s announcement. After the Fed statement was released, the five-year initially rallied 10 basis points from the prior-day close, and then another six basis points to yield 73 basis points at month-end. The 10-year had a similar rally, pushing its yield down 11 basis points, followed by another 20 basis points to yield 1.79% at month-end. The two-year/ten-year spread flattened by seven basis points to end at 150 basis points. The Barclays Capital U.S. Treasury Index returned 42 basis points, while the Barclays Capital U.S. Aggregate Index returned 88 basis points.

The municipal sector, represented by Barclays Capital Municipal Index, began 2012 with a gain of 2.31% on strong fund inflows and light supply. The cash market, represented by Variable Rate Demand Obligations, saw strong demand in the first half of the month. Investors sought the safety of short-term debt as economic uncertainties surfaced. Yields at the 10-year point of the AAA general-obligation curve fell by approximately 14 basis points, while the 30-year point moved lower by 27 basis points. High-grade municipal yields as a percentage of Treasury yields fell on the month as a result of higher muni prices. The yield on 10-year AAA general-obligation debt as a percentage of Treasurys started the month around 106% and fell to 102.00% by month-end— but remains above historical averages. We expect these levels to hold amid ongoing headline risk.

Credit spreads narrowed as investors’ risk appetite increased. Aggregate investment-grade option-adjusted spreads, as measured by the Barclays Capital Credit Index, ended 26 basis points tighter and provided 165 basis points of excess return over Treasurys. Risk appetite was strong, providing the backdrop for a healthy supply calendar. There was $116 billion in new supply, with Financials providing approximately $40 billion.

The economic picture remains clouded due to the ongoing European debt crisis and tepid U.S. economic growth. Given the headwinds, Fed Chairman Ben Bernanke may continue to hint at another round of fresh asset purchases. We maintain our view that the U.S. economy is showing signs of continued but slow growth. We look to remain underweight Treasurys, but will consider buying on dips if meaningful opportunities arise. We have a positive view of Treasury Inflation Protected Securities, as the Fed’s policy efforts have set the backdrop for future inflation. We are also positive toward investment-grade corporate debt and neutral on agency spreads. Finally, we expect volatility to remain as investors continue dissecting the risks and potential outcomes of the European debt crisis.

If you have any questions regarding this commentary or the markets, please contact your SEI representative. Thank you.      

This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice. This information is for educational purposes only.

There are risks involved with investing, including loss of principal. Diversification may not protect against risk. TIPS can provide investors a hedge against inflation, as the inflation-adjustment feature helps preserve the purchasing power of the investment. Because of this inflation-adjustment feature, inflation-protected bonds typically have lower yields than conventional fixed-rate bonds and will likely decline in price during periods of deflation, which could result in losses. Bonds and bond funds will decrease in value as interest rates rise. No mention of particular securities should be construed as a recommendation or considered an offer to sell or a solicitation to buy any securities.

SEI Investments Management Corporation or its employees may sometimes hold positions in the securities discussed here. Fixed Income Portfolio Management is a unit of SEI Investments Management Corporation, which serves as the investment advisor.