AdvisorShares Weekly Market Review
Highlights of the Prior week
For the week of June 17 – June 21
Once again, US stock indexes declined last week based on investors’ fears of rising interest rates. While markets were rising at the beginning of the week, on Wednesday, Federal Open Market Committee Chairman Ben Bernanke said that if the economy continued on its current growth path, the Fed would scale back on asset purchases by the end of the year and attempt to end the extraordinary measures by the middle of 2014. While Bernanke made clear that the Fed will only target gradual changes in the fed funds rate and does not plan to sell agency mortgage backed securities anytime soon, investors still reacted negatively to the news that quantitative easing would soon come to an end. Thursday was a particularly bad day for US stocks, as the S&P 500 Index fell 2.5%, making it the biggest one day fall since November 2011. In addition to worries about rising interest rates in the US, news out of China also added to bearish sentiment worldwide. After rising for two weeks, short-term interest rates in China quickly shot up on Thursday. Due to a cash crunch in the Chinese financial system, interbank lending rates hit an all-time high. So far the Chinese central bank hasn’t taken action to increase liquidity in the financial system, probably because they want to curb what many see as excessive credit growth over the past few years.
No segment of the U.S. fixed income market was spared in last week’s sell-off. The 10-year Treasury yield rose to a 22-month high and Treasury inflation protected securities were even more out of favor as the CPI only increased by 0.1% in May. Lower-coupon bond and mortgage-backed securities faced steeper declines than their higher coupon counterparts. Issuance of new bonds was very subdued because of the heightened volatility and many deals in the municipal space were delayed until next week. Most trading in the secondary market was in securities with shorter-duration which have been in favor lately because their prices are less affected by changes in interest rates.
*Indexes are from Reuters and Yahoo! Finance 4pm closing data
*Gold prices are from EcoWin and J.P. Morgan Asset Management
*Treasury rates are from Bloomberg.com
*Municipal and high yield rates are from Barclays Capital
*30 year mortgage rate comes from the Mortgage Bankers Association (MBA)
Past performance is not indicative of future results.
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