Fixed Income Quarterly Review
Fixed Income Quarterly Review, 12 / 2006
Chart 1: The Treasury Yield Curve
The Treasury yield curve rose across all maturities during the fourth quarter with short maturities rising the most. The rise in rates during the fourth quarter largely reflected a partial reversal of some of the pessimism in the economy that had pushed rates lower during the third quarter.
Two-year Treasury notes rose 0.12% to end the quarter at 4.80%. Ten-year Treasury notes rose 0.08% to end the quarter at 4.70%..
Chart 2: The Shape of the Yield Curve
The yield curve inverted slightly during the fourth quarter with the yield spread between two and ten-year Treasury notes falling from -6 basis points to -10 basis points. As indicators during the fourth quarter showed economic activity to be more robust than the bond market expected, short maturities rose in yield more than long maturities.
Chart 3: Corporate Bond Spreads
Continuing a trend that began in 2005, investment grade yield spreads continued to widen modestly during the fourth quarter.
Investment grade yield spreads as measured by 5-year A-rated corporate bonds widened by 3 basis points, ending the quarter 41 basis points over a comparable maturity Treasury note.
Chart 4: Intermediate Term Bond Market Performance By Sector
The investment grade bond returns during the fourth quarter mimicked, in scale, the returns for the year. Mortgage-backed securities had the best performance while Treasury securities had the worst. On a credit adjusted scale, U.S. government agency notes performed well trailing the investment grade corporate bond market by 0.2% for the quarter and 0.1% for all of 2006.
Chart 5: National Association of Home Builders Market Index
The National Association of Home Builders Market Index deteriorated markedly during 2006. After falling to 30 in September, a level not seen since the first quarter of 1991, the index moved up slightly in the fourth quarter to end with a reading of 32. While far from good, the stabilization of the index during the fourth quarter has the market cautiously optimistic that conditions will improve during 2007.
The National Association of Home Builders Market Index is based upon a monthly survey of homebuilders. Survey results range between 1 and 100 with 100 being the best. Readings above 50 indicate homebuilders are seeing better economic conditions.
Chart 6: U.S. Unemployment Rate
The unemployment rate has been falling steadily in recent years and continued this trend during the fourth quarter. The measured unemployment rate fell to 4.5% at the end of 2006 and holds the hope of continued consumer resilience in the coming year.
Note: The unemployment rate is measured monthly by the Bureau of Labor Statistics. The rate represents the number of unemployed people as a percentage of the labor force. Since the introduction of the survey in January 1948, the unemployment rate in the U.S. has averaged 5.6%.
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