Thought Leadership

Market Review and Outlook 3rd Quarter 2010

October 21, 2010

Market Commentary

Period Summary
Persistent mixed data has nurtured the uncertainty over a U.S. economic recovery.  Recent numbers on residential housing suggest that home sales have bottomed out, yet excess supply remains a significant headwind.  Further exacerbating this supply/demand imbalance is an anticipated increase in foreclosures as delinquency rates remain high.  Employment has also shown
few signs of improvement, and we anticipate the unemployment rate will remain relatively high over the next year.  These negatives may result in GDP growth in the low single digits for at least the next year, a consensus that we feel was reflected in the bond markets over the past quarter.  The prolonged flight-to-quality trade continued through the third quarter, as the 10-year Treasury yield declined from 2.9% at the beginning of the quarter to 2.5% as of September 30th.  The 10-year municipal yield dropped from 2.8% to 2.4% in the third quarter.  The gains in the fixed income markets can also be attributed to anemic money market yields, which have resulted in significant inflows into bond mutual funds, particularly in the first two months of the
third quarter.