Inside This Issue—Second Quarter 2010
The Impact of Financial Reform
The Dodd-Frank bill, recently passed by Congress, can be considered the most far-reaching financial legislation in over 80 years. It will have a lasting impact on critical elements of the financial environment, including Federal Reserve oversight and transparency, rating agency protocol and behavior, credit risk retention, and derivatives treatment. Whether the legislation will actually serve to protect consumers or mitigate the risk of another financial crisis, however, remains unclear at best.
Fixed Income Sector Review
Treasuries rallied sharply in the second quarter as the European sovereign debt crisis led to deteriorating financial conditions and a reduction of global economic growth forecasts. Stubbornly high unemployment, waning fiscal stimulus, and accommodative monetary policy increased the appeal of Treasuries, leading to declines in Treasury yields and a flattening of the curve. The strong rally in Treasuries led to a hefty 4.69% return for the Barclays Capital U.S. Treasuries Index, its best quarterly performance since the fourth quarter of 2008.
Economic Update
Investor sentiment did an about-face in the second quarter. In April, 10-year Treasury yields increased to near 4% and the Dow rose above 11,000 as the self-reinforcing nature of the recovery was widely touted and corporate earnings beat expectations again. Economists, meanwhile, were busy debating when the Fed would remove the "extended period" language from the FOMC statement.
International Update
The second quarter proved to be another challenging one for international bond market investors. The European political establishment's initial inept response to the Greek debt crisis led predictably to a full-blown crisis, threatening peripheral European nations like Portugal and Spain and endangering the existence of the common currency.
Investment Results as of 6/30/10
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