Carret Asset Management

High-quality municipal bonds should continue to move in concert with U.S. Treasury bonds. We expect supply to decrease slightly to be more closely aligned with softer demand. The media will continue to cast a light on the challenges facing the market. As the overall economy improves, we envision states and local municipalities following suit. Downgrades may continue to occur but the most severe cuts should be limited to the marginal parts of the municipal landscape. In closing, we expect structural change to occur, in a positive way, over the next few years.

In mid-July, Federal reserve Chairman Ben Bernanke stated there is 'unusual uncertainty' with regards to the nation's economic outlook. As interest rates trend higher over the coming years from record lows, the yield curve will flatten. And as the economy improves, spreads between higher-risk credits and Treasury bonds will narrow.

A combination of spending cuts and tax increases could weigh on economic growth. This is important to bond investors over the short term, as global deleveraging will create slower global GDP growth and provide lower levels of inflation. In the longer term, governments will probably use their printing presses to inflate their way to lower debt levels while investors will demand greater returns relative to the interest rate and credit risks they assume. Thus, with an outlook towards higher rates in the years to come, Carret remains focused on short-duration, high quality portfolios.

Chairman Bernanke has started to turn the Federal Reserve's liquidity spigot off, and will continue this process through the remainder of this year and into next. It will be a slow process, as the Fed remains concerned about the fragility of the economic recovery. With unemployment at elevated levels, foreclosures a topic of daily conversation and with banks still stingy about extending credit, the Fed seems focused on letting this economy gain its footing versus worrying about the potential risk of inflation.