Overall Bond Market Outlook:
The bond market generated a strong performance in 2011, with long-term U.S. Treasury bonds realizing double-digit returns. In general, higher-quality bonds outperformed riskier bonds as investors sought safe harbor in volatile markets. During the second half of 2011, both investment-grade and high-yield bonds have experienced rising yields, and underperformance relative to U.S. Treasuries, due to economic volatility in Europe. At the same time, however, the underlying fundamentals of U.S. companies continue to improve: earnings are strong, balance sheets are robust, and many companies are continuing to find room to reduce costs. As a result, there exists room for improvement in both asset classes this year should the economic climate in Europe improve. This year, bond market returns likely will remain stable since interest rates are at near historic low levels. Thus, I expect interest rates to remain relatively near historic lows. Further, I expect the Federal Reserve to keep short-term interest rates near zero in 2012. A recent consumer price index report indicated that overall inflation had decreased to 3.0% while the core inflation rate had slipped to 2%. The Fed’s “Operation Twist”, aimed at holding down long-term rates, is not expected to be completed until the middle of next year. Last year, the total return for the Barclays Aggregate Bond Index was 7.8%, led by strong gains in U.S. Treasuries. Last year’s common theme was the outperformance of high-quality bonds over riskier bonds. Longer-term Treasuries returned more than 30%. In the corporate bond sector, bonds in traditionally safe sectors such as utilities outperformed riskier financial-sector bonds. I expect the United States to avoid a recession, but slower growth may inhibit domestic growth. The ongoing European debt crisis has been a contributing factor to the