2002 Target Term Trust Inc. -- Second Quarter Commentary.

NEW YORK--(BUSINESS WIRE)--Aug. 12, 1999--

2002 Target Term Trust Inc. (NYSE: TTR) is a closed-end management investment company investing in high quality fixed-income and adjustable-rate securities.

The second quarter of 1999 proved challenging for the bond markets. Treasury yields rose sharply and the overall market suffered losses as spreads (the difference in yield or income that securities must pay to compensate for the additional risk) over Treasurys widened. Interest rate increases were concentrated in May following the CPI report (reflecting rising oil prices) and subsequent fears of near-term Federal Reserve tightening. The Fed did, in fact, raise the federal funds rate by 0.25% at quarter-end and announced a neutral stance. The yield on the 30-year bond spiked to 6.25% before falling back to close the quarter just under 6%. On average, Treasury yields rose 50 basis points (0.50%) across the coupon curve and the front end of the yield curve (overnight to two-year maturities) steepened.

In a reversal of the post-crisis trend, spreads widened across most non-Treasury sectors; that is, yields on non-Treasury securities rose faster than on similar-duration Treasurys. The underperformance of non-Treasurys was accelerated by both fundamental factors (fears of rising interest rates, widening swap spreads) and technical factors (increased issuance, the approach of quarter-end), and predictably coincided with episodes of deterioration in the Treasury market. The investment-grade sectors -- agency, asset-backed, corporate and mortgage-backed -- each widened approximately 10 basis points (0.10%) during the quarter. Non-investment grade sectors--high-yield and emerging market debt -- closed the quarter slightly narrower than at the outset despite widening sharply in May.

The Trust underperformed its benchmark due to the spread widening that occurred in the mortgage- and asset-backed securities markets. Most spread products, including mortgage-backed securities, were adversely affected due to liquidity concerns surrounding quarter-end or year-end balance sheet restrictions for many dealers. Heightened sensitivity to current and future monetary policy also increased risk premiums.

Portfolio Positioning

The Trust maintained a target duration equal to its benchmark. We increased the Fund's exposure to asset-backed securities by 6%; we invested in short-term auto and equipment leasing paper that offered stable cash flow, attractive spreads to the mortgage-backed sector and diversification. Our longer-term strategic allocations to the collateralized mortgage obligation, pass-through and adjustable-rate mortgage sectors remained fairly stable.

Outlook

Despite today's more attractive valuations, our outlook for the U.S. bond markets remains cautious. Although we do not believe the economy is in any danger of overheating near-term, we do expect the Federal Reserve to raise the federal funds rate by an additional 0.25% over the next few months. We also expect that uncertainty surrounding new issuance trends and Y2K may intensify investor skittishness and lead to pockets of spread volatility. As a result, we will continue to approach the management of the Trust opportunistically -- reallocating assets only if and when relative value analysis clearly dictates.

The commentary reflects our views at the time of this writing. These views may change in response to changing circumstances.