Robert F. Carey, CFA

Chief Investment Officer

First Trust Portfolios L.P.

2010 Market Update/Outlook

This report was prepared by First Trust Advisors L. P., and reflects the current opinion of the authors.  It is based upon sources and data believed to be accurate and reliable.  Opinions and forward looking statements expressed are subject to change without notice.  This information does not constitute a solicitation or an offer to buy or sell any security.

Money Flowing Into Equities: Block Trades

-10000

10000

30000

50000

70000

90000

110000

130000

800

850

900

950

1000

1050

1100

1150

1200

1250

4/14/09 6/14/09 8/14/09 10/14/09 12/14/09 2/14/10 4/14/10

S&P 500 Block (millions USD)

Source: Bloomberg

Money Flowing Into Equities: Non-Block

Source: Bloomberg

-1500

-1000

-500

0

500

1000

1500

2000

2500

800

850

900

950

1000

1050

1100

1150

1200

1250

4/15/09 6/15/09 8/15/09 10/15/09 12/15/09 2/15/10 4/15/10

S&P 500 Non-Block (millions USD)

Bond FundsStock Funds

Source: Investment Company Institute

Open-end Funds Net InflowsJanuary 2009 to Feb 2010

$50b

$40b

$30b

$20b

$10b

0

-$10b

-$20b

-$30b

Jan Feb Mar Apr Jun Jul Aug Sept Oct Nov Dec Jan Feb

V =

Market Valuation Equation

Asset TurnsAsset Turns X MarginMargin

X X TAXESCredit Spread

Bond Spreads Over 10-Year Treasury

Source: Citigroup Global Markets / Haver Analytics, Bloomberg, Merrill

0

5

10

15

20

25

1997 1999 2001 2003 2005 2007 2009

10-Year Treasury

Corporate Junk Bond

BBB Bonds

Muni Bonds

percent

CDS Spreads

0

500

1000

1500

2000

2500

Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10

Investment Grade Hi Yield Emerging Market

basis points

Source: CDS, Bloomberg

Market Valuation & S&P Chart1986 to Current

4.23.10

Monthly Index Closes S&P 500 Index

Market Valuation & S&P Chart

S&P 500Cash Flow ROI

Discount Rate

Median CFROI

4.23.10

Globalization and Correlation

Correlation of Foreign Stocks to the S&P 500

0.0

0.2

0.4

0.6

0.8

1.0

1990 1995 2000 2005 2010

MSCI EAFE Index

MSCI Emerging Markets Index

NIKKEI 225 Index

Source: Bloomberg

Source: Bloomberg, AAII

AAII Bearish Index

20

30

40

50

1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009

percent

52 Week Average

Source: Bloomberg

AAII Bearish Index / S&P 500 Total Return

Where’s The Value?

4.23.10

Web Resources

Jeffrey K. Schroeder

Senior Managing Consultant

PFM Asset Management, L.L.C.

2010 Investment Overview

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

1965 1967 1970 1972 1975 1977 1980 1982 1985 1987 1990 1992 1995 1997 2000 2002 2005 2007 2010

10-Year U.S. Treasury Yields1965 - 2010

Long-Term Treasury Yields

Source: Bloomberg

3.45% on 05/17/2010

Longest Bull Market in History

Yield Curve Flattens On Concerns In Europe

4/1/10 5/14/10 Change

3 month 0.15% 0.15% - 0.01%

6 month 0.23% 0.21% - 0.02%

1 year 0.39% 0.33% - 0.06%

2 year 1.06% 0.78% - 0.27%

3 year 1.60% 1.29% - 0.31%

5 year 2.59% 2.16% - 0.43%

10 year 3.87% 3.45% - 0.42%

30 year 4.73% 4.34% - 0.39%

U.S. Treasury Yield CurveApril 1, 2010 versus May 14, 2010

Source: Bloomberg

• Concerns, that Greece and other European countries will be unable to repay debt, led longer-term U.S. Treasury rates lower by more than 0.40% from April to May.

• At the same time, short-term rates remained unchanged, leading to a flattening of the yield curve. Still, from a historical perspective, the yield curve remains steep.

Yield Curve Continues To Flatten

2-Year and 10-Year U.S. Treasury SpreadMay 1, 2000 – May 14, 2010

• The debt crisis in Europe weighed more heavily on long-term yields than short-term yields as the prospects for long-term growth in Europe have diminished. 10-year U.S. Treasury yields have dropped between 0.40% and 0.50% from the beginning of April, with 10-year U. S. Treasuries yielding below 3.5%. In that same period 2-year yields dropped about 0.30% to yield under 0.80%.

Source: Bloomberg

Current Short-Term Investment Rates

Source: Bloomberg

0.00%

0.20%

0.40%

0.60%

0.80%

1.00%

1.20%$1mm FDIC Insured CDs

Commercial Paper

Federal Agencies

U.S. Treasuries

Investment Rates as of May 17, 2010

• Allocation to longer-term strategies should be based on the each entity’s investment objectives, risk tolerance, and liquidity needs

*Illinois Funds Money Market Fund**Source: Bloomberg, Illinois Funds Website

Longer-Term Portfolios Outperform over Time

Risk/Return of Various Benchmarks10 Years Ended 3/31/2010

Cumulative Quarters WithOverall Value of Negative

Merrill Lynch Index Duration Return $25,000,000 Returns

3-Month Treasury Bill 0.23 Years 2.84% $33,097,427 0 out of 40

6-Month Treasury Bill 0.48 Years 3.25% $34,429,160 0 out of 40

1 Year Treasury Index 0.99 Years 3.69% $35,941,198 3 out of 40

0-3 Year Treasury Index 1.55 Years 3.93% $36,779,215 3 out of 40

1-3 Year Treasury Index 1.92 Years 4.42% $38,540,345 4 out of 40

1-5 Year Treasury Index 2.65 Years 4.93% $40,478,470 10 out of 40

1-10 Year Treasury Index 3.94 Years 5.39% $42,266,968 11 out of 40

3-5 Year Treasury Index 3.88 Years 5.96% $44,620,953 14 out of 40

Wendy J. Flaherty

Senior Vice President

First Trust Portfolios L.P.

2010 Debt Market Overview

Municipal Market Overview

0

0.5

1

1.5

2

2.5

3

3.5

4

4.5

5

5.5

0.0%

25.0%

50.0%

75.0%

100.0%

125.0%

150.0%

175.0%

200.0%

225.0%

07/0

3/07

01/0

1/08

09/1

5/08

01/0

1/09

05/1

4/10

% Muni's to Treasuries

10 y Treas

10 y Muni MMAI

JP Morgan takes over Bear Stearns

Lehman Brothers Collapses

Build America Bonds go to Market

Insurers in Transition

Deterioration of once Aaa rated bond insurers has changed the market for municipalities:

Today, to obtain low interest rates and sell your bonds in the market it is necessary to have and maintain a strong underlying rating.

Insurer Moody's Rating S&P's Rating 2 Years AgoAmbac Caa2 R Aaa/AAAAssured Gty Aa3 (NEG) AAA (NEG) Aaa/AAABHAC Aa1 AA+ Aaa/AAACIFG WR NR Aaa/AAAFGIC WR NR Aaa/AAAAGM (f. FSA) Aa3 (NEG) AAA (NEG) Aaa/AAANATL (f.MBIA) Baa1 A Aaa/AAAXLCA (Syncora) Ca R Aaa/AAARadian Ba1 BB- Aaa/AAA

Updated 3/26/2010

Ratings in Transition

Prior to credit crisis, investors relied on insurance to enhance the value of their bonds60% of new issues were insured at its peak.

Today, less than 10% of new issues are backed by insurance.

Credit ratings and understanding of municipal credit is more important today than ever before.

Rating agencies are recalibrating municipal credit ratings – resulting in higher ratings for most government agencies.

Why? Municipal credits default rates are so low only .03% as compared to nearly 1% in corporate bonds.

What does this mean for your District? It is more important than ever to maintain financial policies and procedures that will preserve the credit quality of your District today and in the future.

American Recovery and Reinvestment Act of 2009

Signed into law on February 17, 2009, the ARRA created significant opportunities for school districts to finance school construction projects.

The ARRA is a “Federal” law. The bonds described in the Act are those that may be issued under federal laws. The bonds must also be issued in accordance with Illinois laws, including the School Code, the Local Government Debt Reform Act, Bond Issue Notification Act and Property Tax Extension Limitation Law.

New Types of Bonds for School Construction

Qualified School Construction Bonds Build America Bonds Recovery Zone Economic Development Bonds Qualified Zone Academy Bonds

Most Popular – Build America Bonds

Issued Taxably vs. traditional Tax Exempt

Issuer receives a 35% subsidy from the IRS

Over $103 Billion in issuance since inception in April 2009 BABs provide taxable fixed income investors with a new

investment option, taxable municipal debt, an alternative to corporate bonds

$0.00

$2,000,000,000.00

$4,000,000,000.00

$6,000,000,000.00

$8,000,000,000.00

$10,000,000,000.00

$12,000,000,000.00

$14,000,000,000.00

Apr

-09

May

-09

Jun-

09

Jul-0

9

Aug

-09

Sep-

09

Oct

-09

Nov

-09

Dec

-09

Jan-

10

Feb-

10

Mar

-10

Apr

-10

BABs Issuance By Month

Amount

Total BABs issued thru April 2010 is over $103 Billion!

BABs Issuance Update

19

190

459

383

198

420

50

100

150

200

250

300

350

400

450

500

< 1MM 1MM - 5MM 5MM - 25MM 25MM -100MM

100MM -500MM

> 500MM

Num

ber o

f dea

ls

BAB Deals Sold by Size

BAB Deals Sold by Purpose Class

State/Local34%

Education22%

Transportation22%

Water & Sewer10%

Power7%

Recreation3%

Hospital2%

Solid Waste / Resource Recovery

0%Industrials

0%

No Purpose Class0%Housing

0%

BAB Coupons – Interest Rates

$0

$5,000,000,000

$10,000,000,000

$15,000,000,000

$20,000,000,000

$25,000,000,000

$30,000,000,000

$35,000,000,000

Zero 0% to 0.9%

1% to 1.9%

2% to 2.9%

3% to 3.9%

4% to 4.9%

5% to 5.9%

6% to 6.9%

7% to 7.9%

8% to 8.9%

> 9%

BABs are issued Taxably and the Issuer receives a 35% subsidy from the IRS

BAB by Rating

$0

$10,000,000,000

$20,000,000,000

$30,000,000,000

$40,000,000,000

$50,000,000,000

$60,000,000,000

AAA AA A BBB BB B CCC CC C SD D NA

Since the majority of ratings are in the A range or better, only 2% of the issues have insurance as an added credit enhancement

Sample Interest Rates

Dated 4/28/2010Delivery 4/28/2010 35%

Maturity PriceTaxable

YieldRate with BABs

35% CreditComparable Tax

Exempt Yield Difference12/15/2010 100.000 1.00% 0.65% 0.80% 0.15%12/15/2011 100.000 1.07% 0.70% 1.20% 0.50%12/15/2012 100.000 1.75% 1.14% 1.40% 0.26%12/15/2013 100.000 2.45% 1.59% 1.70% 0.11%12/15/2014 100.000 2.85% 1.85% 2.05% 0.20%12/15/2015 100.000 3.60% 2.34% 2.37% 0.03%

12/15/2016 100.000 3.97% 2.58% 2.87% 0.29%12/15/2017 100.000 4.70% 3.05% 3.18% 0.13%12/15/2018 100.000 4.90% 3.18% 3.40% 0.22%12/15/2019 100.000 5.20% 3.38% 3.60% 0.22%12/15/2020 100.000 5.30% 3.44% 3.75% 0.31%12/15/2021 100.000 5.50% 3.57% 3.90% 0.33%12/15/2022 100.000 5.60% 3.64% 4.00% 0.36%12/15/2023 100.000 5.70% 3.70% 4.10% 0.40%12/15/2024 100.000 5.85% 3.80% 4.20% 0.40%12/15/2025 100.000 5.85% 3.80% 4.25% 0.45%12/15/2026 100.000 5.85% 3.80% 4.30% 0.50%12/15/2027 100.000 6.25% 4.06% 4.35% 0.29%12/15/2028 100.000 6.25% 4.06% 4.40% 0.34%12/15/2029 100.000 6.25% 4.06% 4.45% 0.39%

Sample Rate SavingsComparative Interest Rates

Build America Bonds

Conclusions

BABs have dramatically changed the municipal bond market– Issuers have a cost effective means of funding capital expenditures– Investors have a new high quality taxable debt option

A temporary event? Remains to be determined:– Many market participants are calling for a permanent extension– The cost to the Federal government is substantial during a

challenging budget environment YET many in Washington believe the Tax Credits are much more efficient than traditional tax-exemption

Given the historical difference in default rates:– The yield differential between BABs and corporate bonds seems

counter-intuitive…will this change over time? – We believe extension will be made at least through 2013