The U.S. economy expanded at a rate of 3% in the first quarter of 2010, slowing from the 5.6% rate registered in the fourth quarter of 2009. The ISM Manufacturing and Non-Manufacturing indices continue to register readings above 50, indicating economic expansion. Inflation remained low, with Core Price Inflation (CPI) excluding food and energy in the 1% range for the quarter. The unemployment rate dropped to 9.5% in June, down from 9.7% in May and 9.9% in April. The Federal Open Market Committee kept interest rates unchanged at its regularly scheduled meetings in April and June, noting the deterioration in financial markets caused by the European fiscal crisis. The committee also noted reduced inflation rates driven by lower energy and commodity prices, and it reiterated its plan to keep rates low for an extended period.

U.S. Treasuries rallied during the quarter, as concern over the fiscal health of the Eurozone sparked a shift of cash into dollar-based assets. Short Treasury bills traded at 0% near quarter end, while one-year Treasury bill yields declined from 0.39% to 0.31%.

The Treasury Portfolio focused its purchases in the three- to nine-month maturity range to take advantage of the higher yields in that sector. We are maintaining excellent liquidity within the Portfolio and will continue to look for opportunities to purchase Treasury securities in the six- to 12-month area.