A difficult job market, ongoing weakness in housing, and a fragile consumer confidence have put some bumps in the road, constraining the economic recovery. However, positive momentum is growing as conditions begin to improve. Modest gains in employment and increases in capital spending are helping smooth the path to recovery.
After both of the Federal Open Market Committee meetings in the first quarter the Federal Reserve (the “Fed”) kept the federal funds rate near zero. Comments from its last meeting still contained its “extended period” language (in regard to how long it will be before the Fed raises rates). In our view, this suggests that the Fed is inclined to keep the fed funds rate near zero as long as inflation expectations are contained and economic growth is subdued.
After moving up and down in a range, yields on the short end of the treasury yield curve finished the quarter down, but close to where they started the quarter. Yields for 2 to 5 year treasuries decreased 12 to 14 basis points. At the end of the quarter spreads widened just slightly for mortgage-backed securities (MBS), as the Fed’s agency mortgage securities purchase program was discontinued.
The Short-Term Government Fund’s return for the first quarter exceeded the Citigroup 1-5 Year Treasury/Government Index. The Fund’s underweight in treasuries and corresponding overweight in agency and MBS holdings, helped performance. With interest rates declining slightly, the Fund’s shorter duration relative to its benchmark hindered performance.
For the coming quarter we expect rates to rise modestly as a new higher range for interest rates develops.
|
