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By Kevin Horan

The month of June came quickly to a close and with it the half year 2014 index results. At the start of the year, expectations were for yields to be above 3% and climbing. In reality rates have done the opposite as the yield on the S&P/BGCantor Current 10 Year U.S. Treasury Index is 2.52%, far from its December 31st level of 3.03%.

The S&P Municipal Bond Index has returned 6.08% year to date and is off to its best mid-year return since June of 2009. Yields have remained relatively stable at 3.96% on a tax equivalent basis after having started the year at 5.06%. High yield municipal bonds tracked in the S&P Municipal Bond High Yield Index have continued to outperform their corporate junk bond counterparts by returning 8.54% year to date.

The S&P/BGCantor U.S. Treasury Bond Index has returned 2.03% year-to-date. This mid-year return erased all of 2013's negative 1.87% with 0.16% to spare. Short and intermediate maturity treasury returns have forced performance seeking investors to assume the risk of the longer end such as the current 13.53% return from the S&P/BGCantor 20+ Year U.S. Treasury Bond Index. Another alternative to improving performance is the picking up of yield by moving down in credit rating. Investment grade corporate bonds as measured by the S&P U.S. Issued Investment Grade Corporate Bond Index and the more speculative grade S&P U.S. Issued High Yield Corporate Bond Index have returned 5.59% and 5.55%, respectively. Lagging behind high yield for the first half of the year is the speculative grade loan index, the S&P/LSTA U.S. Leveraged Loan 100 Index, which has returned 2.48%.

Recently the discussion of inflation has come up after a third increase in CPI which presently stands at 0.4% month-over-month. The Fed had stated that even though recent inflation measures are a bit high, the data is noisy. A wait and see approach has been adopted by the Fed as mentioned in Eric Morath's Wall Street Journal article, U.S. Inflation Hits Highest Level for Year and a Half. Inflation protection securities as measured by the S&P U.S. TIPS Index have returned 5.63% year-to-date.

Between World Cup Football and the upcoming U.S. July 4th holiday, not much productivity is expected for this week. In addition to the football matches, the economic calendar could add some excitement for market participants. Today has already seen the release of the Chicago Purchasing Managers Statistics (62.6 actual versus the prior 65.5), U.S. Pending Home Sales Index (6.1% actual vs. 0.4% prior) and the Dallas Fed Manufacturing Index (11.4 vs. 8.0 prior). The next few days will provide ISM Manufacturing (55.9 expected), Construction Spending (0.5% exp.), MBA Mortgage Applications (prior: -1.0%) and Factory Orders (-0.3% exp.). July 3rd's schedule contains Trade Balance but also the significant numbers of the Unemployment Rate and Initial Jobless Claims. The U.S. markets will be closed for the 4th of July holiday, ending the week.
Source: S&P Dow Jones Indices, Data as of 6/27/2014

(click to enlarge)

Note: The S&P/LSTA U.S. Leveraged Loan 100 Index comparison uses yield-to-maturity.

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Source: GOOAL! For Mid-Year Treasury And Muni Returns