All-American Term Trust Inc.-- Quarterly Commentary for March 31, 2000.Business Editors NEW YORK--(BUSINESS WIRE)--June 20, 2000 All-American Term Trust Inc. (NYSE NYSE See: New York Stock Exchange :AAT Alpha-1-antitrypsin (AAT) A blood component that breaks down infection-fighting enzymes such as elastase. Mentioned in: Chronic Obstructive Lung Disease ) is a closed-end management investment company with an investment objective of providing a high level of current income, consistent with the preservation of capital Preservation of Capital An investment strategy whose primary goal is to prevent the loss of an investment's total value. Notes: For investors using the capital preservation strategy to achieve their goal, they must ensure their portfolio is producing a return that is at . Commentary The first quarter of 2000 has proved extremely difficult for fixed income managers. The strength in the economy shows no signs of waning. The Federal Reserve (the Fed) is in an active, albeit gradual mode of tightening. It raised short-term interest rates Short-term interest rates Interest rates on loan contracts-or debt instruments such as Treasury bills, bank certificates of deposit or commerical paper-having maturities of less than one year. Often called money market rates. 50 basis points in the first quarter, and we anticipate further rate hikes. Modest inflationary pressures are evident, most notably in the commodity sector. However, the broad inflation situation is contained. Year-over-year average hourly earnings have risen less than 4%. Sustained productivity growth continues to contain pricing pressures. Nonetheless, these positive fundamental virtues were overshadowed by the technical situation during the first quarter. As the year began, the U.S. Treasury U.S. Treasury Created in 1798, the United States Department of the Treasury is the government (Cabinet) department responsible for issuing all Treasury bonds, notes and bills. Some of the government branches operating under the U.S. Treasury umbrella include the IRS, U.S. announced its final release of regulations regarding buy-backs as it confronts budget surpluses running at about $160 billion. Of surprise to the market though was the larger than expected $30 billion debt repurchase program for 2000 that focuses primarily on the long end of the yield curve. The radical inversion inversion /in·ver·sion/ (in-ver´zhun) 1. a turning inward, inside out, or other reversal of the normal relation of a part. 2. a term used by Freud for homosexuality. 3. of the Treasury curve that followed this announcement severely dislocated dis·lo·cate tr.v. dis·lo·cat·ed, dis·lo·cat·ing, dis·lo·cates 1. To put out of usual or proper place, position, or relationship. 2. hedged trading positions and led to a material widening in all high-grade spreads. Treasury Undersecretary Gary Gensler Gary Gensler was Undersecretary of the Treasury (1999-2001) and Assistant Secretary of the Treasury (1997-1999) in the United States. Gary Gensler spent 18 years at Goldman Sachs, making partner when he was 30, becoming head of the company's fixed income and currency compounded the negative sentiment in the market when he challenged the markets' assumption of an implied Government guarantee for agency debt. Portfolio Positioning Because the Trust will terminate on or about January 31, 2003, its duration is constrained con·strain tr.v. con·strained, con·strain·ing, con·strains 1. To compel by physical, moral, or circumstantial force; oblige: felt constrained to object. See Synonyms at force. 2. . At quarter-end, 21% was allocated to securities rated below BBB BBB A medium grade assigned to a debt obligation by a rating agency to indicate an adequate ability to pay interest and repay principal. However, adverse developments are more likely to impair this ability than would be the case for bonds rated A and above. . (As of March 31, 2000. The Trust's portfolio is actively managed, and its composition will vary over time.) On the high-grade side, the Trust's position is focused on broker-dealer credits, credit-card issuers and insurance companies. During the quarter we added to the Trust's industrial holdings with the purchases of Goodyear (2.1%) and Panamsat (0.7%). Performance The Trust's emphasis on the corporate sector--investment grade and high yield--coupled with its short duration caused it to underperform. The high-yield, less-liquid sectors of the market have been particularly poor performers. All-American Term Trust held roughly 22% of its assets in the high-yield sector at January 31, 2000. Outlook While we attach importance to structural issues such as divergent di·ver·gent adj. 1. Drawing apart from a common point; diverging. 2. Departing from convention. 3. Differing from another: a divergent opinion. 4. supplies of public and private sector debt, we remain focused on our more predictable relative-value framework which gauges the appropriateness of spread levels to fundamental risks and differentiates between risk-bearing and risk-free fixed income assets. We continue to believe that corporate bonds and mortgage-backed bonds represent the most attractive areas of the market. We anticipate that economic data will continue to point to robust growth. The Fed is biased to continue raising rates. The fundamental backdrop appears to support our bias to overweighting corporates and mortgages. However, we envision continued volatility in the spread sectors until the technical situation stabilizes. Special Considerations The Trust's investment objective is to provide a high level of current income, consistent with capital preservation. Based on the Trust's net asset value of $12.30 per share as of May 18, 2000, the time remaining until the Trust's termination on or about January 31, 2003, and assuming the continuation of current market conditions, Mitchell Hutchins believes that it is unlikely that the Trust will be able to return the full amount of its $15 initial offering price to shareholders upon its termination. This Quarterly Commentary reflects our views at the time of its writing. These views may change in response to changing circumstances. |
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