In the Market: Stocks Gain in First Quarter While Bonds Take a Break

Stocks provide positive returns

For equity investors, the first quarter of 2006 got off to a roaring start, especially in the mid- and small-capitalization segments. The S&P 500 Index, a measure of large capitalization companies rose 4.21 percent during the quarter; the Russell MidCap Index advanced 7.61 percent and the Russell 2000 Index, a measure of small-capitalization companies surged 13.94 percent.

International markets cruised to a strong quarter as developed markets, as measured by the Morgan Stanley Capital International (MSCI) Europe Australasia Far East (EAFE), returned 9.47 percent. All countries in this index of non-U.S. developed markets posted a return higher than that of the S&P 500 Index. The U.S. dollar declined modestly over the quarter aiding the returns to U.S. investors.

Longer bonds fall as “the Maestro” retires and “the Bond” returns

The bond markets absorbed two major changes to the status quo during the first quarter. After 18 years as Chairman of the Federal Reserve, Alan Greenspan retired. His successor, Ben Bernanke, seems to have picked up where Greenspan left off. The Federal Open Market Committee (FOMC) raised the target Fed Funds rate twice during the first quarter, lifting the rate from 4.25 percent to 4.75 percent by quarter end. (The Fed can influence economic activity by raising and lowering the costs for business and consumer borrowing.) In each of their 15 meetings since mid-2004, the FOMC has raised this key rate by 0.25 percent.

The reintroduction of the 30-year Treasury bond also impacted the bond market this quarter. Commonly referred to as “The Bond” in fixed income arenas, the Treasury discontinued the 30-year in 2001 due to budget surpluses realized during the late 1990s. Given the more recent budget deficits, the Treasury reissued the 30-year at the February auction where demand for this bellwether was strong.

These two events, a 0.50 percent increase in Fed Funds and an increased supply of long-term bonds, both served to reduce the price of longer maturity bonds, leading to negative returns for all but short-term maturities. Much of the decline came in March, following the 30-year auction and a changing market sentiment that the March rate increase would not be the last for the foreseeable future.

While equity investors have experienced a strong first quarter, and bond investors have experienced a setback, investors are reminded that trends and predictions cannot be drawn from any three-month period. As always, a thoughtfully constructed, long-term focused asset allocation serves investors well.

Please consult both the current Vantagepoint Funds Prospectus and Making Sound Investment Decisions: A Retirement Investment Guide carefully for a complete summary of all fees, expenses, charges, financial highlights, investment objectives, risks and performance information. Investors should consider the Fund’s investment objectives, risks, charges and expenses before investing or sending money. The prospectus contains this and other information about the investment company. Please read the prospectus carefully before investing. Vantagepoint securities are ar distributed by ICMA-RC Services LLC, a broker dealer affiliate of ICMA-RC, member NASD/SIPC. For a current prospectus, contact ICMA-RC Services LLC, 777 North Capitol Street NE, Washington, DC 20002-4240. 1-800-669-7400