During the quarter market participants began to give more weight to strengthening economic quarter, news, discounting the Fed’s stated commitment to hold short-term interest rates low into 2014. The steady decline in weekly initial unemployment claims, which is now translating into monthly job gains, is especially encouraging. For more info: http://www.nafcu.org/nifcus/

1. First Quarter 2012
Market Commentary
During the quarter market participants began to give more weight to strengthening economic
quarter,
news, discounting the Fed’s stated commitment to hold short-term interest rates low into 2014.
The steady decline in weekly initial unemployment claims, which is now translating into monthly
job gains, is especially encouraging.
Technical factors, as well as growth optimism, saw rates drift modestly higher across the Treasury
yield curve, with the 2-year note rising 13 basis points to a high yield of 0.39% on March 20th,
before ending the quarter at 0 33% The Fed’s Operation Twist program of selling shorter maturity
0.33%. Fed s
Treasuries to extend their portfolio holdings has resulted in an unusually high amount of under 3-
year paper on dealer balance sheets, just as the Treasury entered its annual period of seasonal
high bill issuance ahead of April tax receipts. This pulled overnight repurchase agreement levels
up slightly, which traded above 0.10% for much of the quarter. These trends have been helpful in
managing the portfolio over the quarter, and even the usual quarter-end squaring of dealer
balance sheets did not materially depress overnight repurchase agreement levels.
Towards the end of the period, mixed U.S. economic readings, further public pronouncements by
domestic policymakers and evidence of financial stresses resurfacing in Italy, Spain and Portugal,
had the Treasury markets rallying once again. Although 4Q 2011 GDP was finalized at a solid
+3.0%, there is some concern that 2012 could follow last year’s pattern of second half slowing.
Rising gasoline prices, approaching a $4.00 nationwide average at the pump, are at an 11-month
high; although they have yet to impact consumer spending as gains in the stock markets over the
quarter seem to be cushioning sentiment.
The mainstream press has picked up on the story regarding the substantial fiscal headwinds that
the economy will face beginning in January of 2013. Despite agreement by Congress to extend
the payroll tax holiday and other interim stimulus measures through year end, as the Presidential
election draws closer, the likelihood of anything material being accomplished to get the U.S. fiscal
house in order is remote. We believe Federal Reserve stimulus is still the main driver of economic
recovery.
The amount of eligible short term securities available for purchase by NIFCU$ has contracted
dramatically over the past five years. The trend is expected to continue, as stronger domestic
bank issuers either have no funding needs or prefer to term out their debt. Risk management and
maintaining higher liquidity positions will remain integral to our strategy as the U.S. financial
markets are still at risk of contagion from Euro-zone stresses.
Euro zone
Hillary Elder, Team Leader
NIFCU$  350 California Street, 11th Floor  San Francisco, CA 94104
Toll-Free (800) 634-6521 www.nifcus.com