KNOWLEDGE CENTER

Knowledge Center Archive

Jul
20
2012

Video: June 2012 Macro Summary View

By Sean P. Simko

Market activity in June was a binary event: One day risk was on, and the next day it was off. Equities were up one day and down the next. It was a case of trading headline-to-headline in the truest sense. Helping to drive the emotional trading was the softening U.S. economic environment. Manufacturing and labor data weakened and trended lower. Inflation at both the consumer and producer levels softened, while equities rallied. We expect volatility to remain as investors prepare to deal with mixed economic data through the summer months and the potential developments of the European debt crisis.

SHOW/HIDE TRANSCRIPT

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 June.

Market activity in June was a binary event: One day risk was on, and the next day it was off. Equities were up one day and down the next. It was a case of trading headline-to-headline in the truest sense. Helping to drive the emotional trading was the softening U.S. economic environment. Manufacturing and labor data weakened and trended lower. Inflation at both the consumer and producer levels softened; this benefited the consumer, as commodity prices fell throughout the month. Equities rallied, with the S&P 500 Index1 rising 3.95%.

The Federal Open Market Committee met in June and, as expected, left the lending rate unchanged, holding it in the range of zero to 25 basis points. It also announced the extension of “Operation Twist” through the end of the year. The Fed’s statement had a dovish tone. It would have been shocking if there was not some type of a downgrade due to heightened global worries in conjunction with what seems to be a stalling labor market within the U.S. economy. However, the Fed provided investors with a sense of comfort by saying that it is willing to act if necessary.

Treasury prices backed off modestly throughout the month, as risk was back in play. Even with the weaker economic data, prices fell and yields moved higher, as investors’ expectations regarding additional Fed stimulus increased. Neither speculation about Greece’s potential exit from the eurozone nor increased investor focus on Spain could reverse the trend. As a result, the two-year/10-year spread steepened 5.0 basis points to 134.0 basis points. For the month, the long end of the curve underperformed, with the 30-year yield rising11.0 basis points to 2.75% and the 10-year yield moving higher by 9.0 basis points to 1.64%. We feel that the U.S. economy is slowing, but not enough to drive it back into a recession. The slowdown will be offset by additional stimulus from the Fed, keeping rates range-bound heading into the second half of the year.2

The municipal sector, as represented by Barclays Municipal Index,3 returned -0.11%. Yields at the 10-year point of the AAA general-obligation curve rose modestly, as municipal securities sold off along with Treasurys. The yield at the 10-year point of the curve rose 10.0 basis points, while yields at the 30-year point rose by a modest 5.0 basis points. High-grade municipals as a percentage of Treasurys richened from the recent price movement. The 10-year AAA general-obligation debt percentage to Treasurys started the month around 129.0%. At month end, this ratio was at 118.0%, still remaining well above historical averages. Similar to our Treasury view, we expect these levels to remain range-bound amid headlines regarding austerity measures and strong investor flows.4

With the view that interest rates will remain range-bound, we look for opportunities to add exposure when temporary back-ups in prices occur. We remain positive toward investment-grade corporate debt and neutral on agency spreads. In the end, we continue to expect volatility to remain present as investors prepare to deal with mixed economic data through the summer months and the potential developments of the European debt crisis.

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

Thank you.

 

1 The S&P 500 Index is a capitalization-weighted index made up of 500 widely held large-cap U.S. stocks in the Industrials, Transportation, Utilities and Financials sectors.

2 Source: Bloomberg

3 The Barclays Municipal Index is considered representative of the broad market for investment grade, tax-exempt bonds with a maturity of at least one year.

4 Source: Barclays

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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. 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.

Index returns are for illustrative purposes only and do not represent actual fund performance. Index performance returns do not reflect any management fees, transaction costs or expenses. Indexes are unmanaged and one cannot invest directly in an index. Past performance does not guarantee future results.

SEI Investments Management Corporation or its employees may sometimes hold positions in the securities discussed here.

SEI Fixed Income Portfolio Management is a unit of SEI Investments Management Corporation, which serves as the investment advisor.

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