Weekly Market Update - August 2, 2010

Interest Rate Data Points

Bond Market Commentary

• Rates Indicate Fed On Hold
In July, the front end of the Treasury curve flattened as 2-years rallied 5 basis points and 5-years rallied 18 basis points. Expectations for Fed Funds rate increases have been pushed further into the future as slower economic growth, low inflation and a stagnant job market keep the Fed on the sidelines. One month ago, according to an economist at RBS, expectations were for a 25 basis point rate hike in June of 2011. Now, the market has pushed a higher Fed Funds rate out to October 2011. SNW Asset Management encourages our clients to view this information as a reflection of recent economic data, not as a perfect predictor of the future.
• Credit Risk on the Rise?
  Earnings for many companies have been coming in better than expected this quarter, and they are taking advantage of these results to announce plans for ways to increase their returns on equity. These plans include increased share buybacks, dividend increases, and increased capital expenditures. Last week General Electric announced plans to increase its dividend by 20% and told investors that it plans to resume share buybacks sooner than predicted. Other companies are taking advantage of the low interest rate environment to restructure their debt and payoff high interest, short-term debt and issue new, longer-term debt. All of these actions have the potential to decrease the credit strength of a company; we will be monitoring these situations to ensure our corporate bond holders are not being asked to shoulder too much pain to fuel profit growth.
• California’s Budget
  California has again failed to pass a budget in a timely manner, as the state has started yet another fiscal year without a new plan. State Controller John Chiang has warned that, if a budget is not passed, California may start issuing IOUs yet again. This, despite the state’s postponed payment of $4.7 billion in bills due to schools, universities and other institutions. Although the spread on California debt is 1.2% above AAA-rated municipal bonds, it is still below the widest point of last year when it reached 1.71% above AAA-rated municipals. While we continue to monitor the situation at both the state and municipal level, we remain confident that the California credits we have selected have the ability to meet debt service requirements thanks to sound management, the foresight to save during the good times and the ability to manage expenses during the bad times.