At the onset of this year, many market participants warned, “expect the unexpected.” Much uncertainty hung about the air. High sovereign bond yields in the European periphery, low Treasury yields in much of the developed world, and the threat of China’s economy slowing were major concerns going into the first quarter of 2012. Now, with hindsight, we see that Q1 2012 contained few negative surprises in the US or in Europe. In fact, some things turned for the better: the European Central Bank calmed debt markets in the euro area and a quarter’s worth of positive US economic data brought hopeful news to investors.

However, a number of challenges remain in the global financial markets. First, economies worldwide are undergoing deep structural changes, rather than normal cyclical changes. This means that not only in the US, but in Europe and Asia, it will take time for the markets to realign and settle.

Second, over the past three to four years, the supply of “safe” assets significantly decreased. This has caused an increase in demand for US Treasuries and it doesn’t appear this investment preference will change much over the short-term. This helps explain the low level of interest rates in the US and elsewhere.

Last, as the US election approaches, we expect uncertainties regarding economic policies (tax rates, financial regulations, etc.) to restrain economic growth over the second half of this year and into the first half of 2013.

Given the above concerns, we expect interest rates in the US to stay relatively low, at least for the foreseeable future. On the other hand, there is more cash on corporate balance sheets than any time in the past century. We believe this provides opportunities in income-producing assets across the credit rating spectrum and around the globe. In particular, the emerging world continues to provide attractive income opportunities, keeping our emphasis on geographic diversification, attractive country balance sheets and the potential for a growing consumer base.

For us, liquidity and diversification remain critical to the investment process. Focusing on these two factors will allow for flexibility in the case of unexpected events and also provide our clients with a degree of comfort.

We, at Payden & Rygel, send our best wishes to our valued clients.