Knowledge Center Archive
Podcast: March 2012 Macro Summary View
March went out like a lamb, but markets roared all the way through, ending the month and quarter strongly. The equity market had its best first quarter since 1998, as the S&P 500 returned 12.56%. Whether it is sterilized quantitative easing or Operation Twist, there is no denying that the Federal Reserve, or Fed, has been engaged.
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 March.
March went out like a lamb thanks to seasonally mild temperatures, but markets roared all the way through, ending the month and quarter strongly. The equity market had its best first quarter since 1998, as the S&P 500 returned 12.56%. Commodities were mixed during the quarter. Gold fever continued, with the precious metal returning just over 6.5%. Oil ended modestly flat at $103.02 per barrel after hitting a high on February 24 at $109.77. Natural gas declined by more than 29% to $2.12 per million British thermal units as surpluses and mild temperatures created an environment for falling prices.
Whether it is sterilized quantitative easing or Operation Twist, there is no denying that the Federal Reserve, or Fed, has been engaged. In fact, it has become the economy’s cheerleading squad—when the market is down, it looks to the Fed to pump it up. The Federal Open Market Committee met in March and kept its monetary policy accommodative. In an almost begrudging fashion, policymakers acknowledged that the economy was improving, as the Committee’s data suggested that the “…economy has been expanding moderately.” The Committee covered the unemployment rate, stating that it “…has declined notably in recent months but remains elevated.” In the end, the comments indicated that the Committee will remain ready to act if necessary. While waiting for additional data to surface, we expect the Fed will telegraph first-quarter results as its next meeting approaches in April.
The Treasury market moved lower in price and higher in yields for the month and the quarter. This move was driven by the view that the economy is in a better place than it was last year. Fueling the selloff were better-than-expected comments from the Fed. As a result, the curve steepened quickly and sharply. For the month, the long end of the curve underperformed, with the 30-year yield rising 25 basis points to 3.36% and the 10-year yield moving higher by 23 basis points to 2.20%. Many participants looked at this move as the start of a new trend. However, we viewed the move as premature, and added to our positions. This proved beneficial when the move reversed its course and rallied toward the end of the month. Risk was back on as the Treasury curve ended down and the two-year/10-year curve steepened 22 basis points.
The Municipal sector, as represented by the Barclays Capital Municipal Index, was down 0.65% for the month. However, the Index returned 1.75% for the quarter. Fueling the move was a combination of strong fund inflows and light supply. Yields at the 10-year point of the AAA general-obligation curve rose approximately 28 basis points, while the 30-year point moved higher by 16 basis points. High-grade municipals as a percentage of Treasurys cheapened on the month from the recent price movement. The 10-year AAA general-obligation debt percentage to Treasurys started the month around 97%. At month end, this ratio was at 99%, again remaining above historical averages. We expect these levels to hold amid headlines regarding potential defaults and bankruptcies, with price action tied to the direction of the Treasury sector.
Spread products put in a strong showing in March. Investment-grade corporate spreads rallied strongly throughout the month across the entire credit curve. Aggregate investment-grade option-adjusted spreads, as measured by the Barclays Capital Credit Index, tightened 6 basis points, with BBB tightening 8 basis points. On a sector basis, Industrials were 1 basis point tighter, Telecom showed strength by tightening 2 basis points and Financial outperformed, tightening 20 basis points. The appetite for risk was strong for the quarter, which provided the backdrop for a healthy supply calendar that was north of $330 billion. Even with the massive supply, spreads tightened 55 basis points for the quarter, led by the Banking sector, which was approximately 125 basis points tighter.
The economic picture is starting to look brighter, although the sustainability of the upward trend is still in question. We are looking for the March nonfarm payroll report to reveal continued job creation. What we need to look for now is how an improving labor market, combined with consumer spending, translates into gross domestic product growth. At this point, we maintain the view that the economy is showing signs of growth.
In terms of our base case, we look to hold firm in our exposure to the Treasury sector after recently adding to our exposure during the recent back-up. We are positive toward Treasury Inflation Protected Securities versus nominals over the long term, and remain neutral in the short term. We are also positive toward investment-grade corporate debt and neutral on agency spreads. In the end, we expect volatility to remain present as investors continue to dissect the risks and potential outcomes of ongoing geopolitical events.
If you have any questions regarding this commentary or the market, please contact your SEI representative.
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.
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Fixed Income Portfolio Management is a unit of SEI Investments Management Corporation, which serves as the investment advisor.
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