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  Credit Check – October 2017
Posted Under: Investment Grade Credit

 
  • Investment Grade (IG) Corporate yield spreads to U.S. treasuries have remained in a tightening trend for 2017 helping to provide positive excess returns.

  • Although spreads appear fully valued, we expect spreads to tighten somewhat into the year-end due to strong corporate earnings which are improving credit metrics for IG companies.
Source: Citigroup Research, 10/12/07-10/11/17. For illustrative purposes only and not indicative of any investment. 
1Option-adjusted spread is the spread relative to a risk-free interest rate, usually measured in basis points, that equates the theoretical present value of a series of uncertain cash flows of an instrument to its current market price. OAS can be viewed as the compensation an investor receives for assuming a variety of risks (e.g. liquidity premium, default risk, model risk), net of the cost of any embedded options. A larger OAS implies a greater return for greater risks.

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Posted on Tuesday, November 7, 2017 @ 8:01 AM • Post Link Share: 
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  Emerging Market Local Currency Review - 3rd Quarter 2017
Posted Under: Emerging Markets
The most widely followed emerging market local currency benchmark, the JP Morgan GBI-EM Global Diversified Index (the "Index") returned 3.55% for the 3rd quarter of 2017 bringing the year-to-date return to 14.28%. The yield on the Index fell 16 basis points (bps) to 5.99% at the end of the quarter while the yield on 5-year maturity U.S. Treasury bonds rose 5bps to 1.94%.

Of the Index's 14.18% year to date return, more than half or 8.02% has come from the domestic Treasury bonds, comprising yield earned as well as the decline in the bond yield of the Index. The remainder of the Index's return came from strengthening emerging market currencies versus the U.S. Dollar (USD) over the period. Broadly though, both domestic bonds as well as emerging market currencies have enjoyed positive momentum since the start of the year.

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Posted on Monday, November 6, 2017 @ 12:24 PM • Post Link Share: 
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  High-Yield Spreads and Time Walk Hand in Hand
Posted Under: Senior Loan
One of the most common metrics evaluated in the high-yield bond market is "spread." Spread is the difference in yield between a highyield bond and a risk free U.S. Treasury bond of a comparable maturity/duration. Simply stated, the spread is the extra compensation an investor requires to bear the additional risk of an asset relative to the risk-free asset. Numerous research papers have demonstrated the benefits of investing in high-yield bonds when spreads are wide of their historical average. We agree that owning high-yield bonds when spreads are "wide" typically creates an attractive entry point into the asset class. However, as counterintuitive as it may seem, owning high-yield bonds when spreads are "tight" to the historical norm has also created attractive entry points into the high-yield asset class. The primary reason is that spread alone is not the only factor to consider. Investors need to consider that spread and time walk hand in hand, and using spread as a way to time an investment in high yield may miss the mark.

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Posted on Wednesday, November 1, 2017 @ 1:46 PM • Post Link Share: 
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  U.S. Investment Grade Credit Investor Update - 3rd Quarter 2017
Posted Under: Investment Grade Credit
Market Review

Despite a bout of pronounced weakening midway through, investment grade credit spreads tightened once again during the third quarter. This makes eight quarters in a row of positive excess return – a winning streak that has only been surpassed once in the last 20 years. The option-adjusted spread on the Bloomberg Barclays Corporate Bond Index tightened 8 basis points (bps) to 101 over the three-month period ending September 30, 2017. This compares to 123 bps at the beginning of the year, and 138 bps at the end of 3Q2016. In the U.S. Treasury market, the benchmark 10-year yield increased from 2.301% to 2.326%, after having traded as high as 2.392% and as low as 2.060% during the quarter.

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Posted on Thursday, October 26, 2017 @ 9:23 AM • Post Link Share: 
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  Alternatives Update 3rd Quarter 2017
Posted Under: Alternatives

The "Great Moderation" is the name attached by economists to the late 1980s through 2007 to describe a period of declining volatility in the business cycle and directly contrasts the preceding period of "Great Inflation." The term was coined by James Stock and Mark Watson in their paper "Has the Business Cycle Changed and Why?" Their findings were presented in April 2002 at an NBER conference and published as a working paper later that year. Stock and Watson put forth 3 possible explanations as to the causes of declining economic volatility: luck, technological and structural changes, or improved monetary policy. In February 2004, Ben S. Bernake, apparently able to scotomize the Dotcom bubble, brought the concept of the Great Moderation to the forefront. Not surprisingly, he made the case that it was improved economic policy that played the dominant role. In the late 1990s, well before Stock and Watson released their paper, there was plenty of talk about how Alan Greenspan, aka the Maestro, had defeated the business cycle. Plenty of irony there to go around for everyone. Last year, Chris Waller and Jonas Crews published a paper titled "Was the Great Moderation Simply on Vacation?" which speculates that the Great Recession of 2007-2009 was a temporary blip and that the Great Moderation has returned. Let's hope they have slightly better timing than Stock and Watson, Greenspan or Bernake.

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Posted on Monday, October 23, 2017 @ 1:46 PM • Post Link Share: 
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  Third Quarter 2017 CEF Review
Posted Under: CEFs

Third Quarter 2017 Overview

The third quarter was another positive one for diversified closed-end fund (CEF) investors. The average CEF was up 2.28% during the quarter and is now up 11.24% year-to-date (YTD). Broadly speaking, CEFs continue to benefit from rising equity prices (both domestic and international), solid credit conditions (i.e., low default environment) and a steady long-term interest rate environment. Similar to prior quarters this year, it was another broad-based rally for the third quarter. Indeed, fixed-income CEFs were up on average 1.88% during the quarter and are now positive by 9.45% YTD. Equity CEFs were positive--on average 2.71% for the quarter and are now up 14.30% YTD. (Source: Morningstar. All data is share price total return.)

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Posted on Monday, October 23, 2017 @ 1:10 PM • Post Link Share: 
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  Senior Loan & High Yield Review - 3rd Quarter 2017
Posted Under: Senior Loan
Macro Overview

Despite numerous geopolitical headlines in the quarter, most notably U.S. tension with North Korea, equities posted a strong third quarter, with the S&P 500 Index up 4.48%. This brought the year-to-date return to a robust 14.24%. Interest rates, as measured by the 10-yr Treasury bond declined for much of the quarter, falling from 2.30% to as low as 2.04% by early September. However, as the quarter progressed, rates bounced to finish the quarter slightly higher than where they began the quarter, closing out at 2.33%. Overall, positive equity market returns supported by relatively benign volatility and optimism surrounding the release of the GOP tax plan combined with higher crude oil prices provided a firm backdrop for credit markets, in our view. Senior loans were up 1.04% in the quarter while high-yield bonds were up 2.04%

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Posted on Tuesday, October 10, 2017 @ 3:33 PM • Post Link Share: 
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  Prospects Improve For European Equity ETFs
Posted Under: ETFs

Summary of Q2 2017 ETF Flows and Trends¹

  • Estimated net inflows for US-listed exchange-traded funds (ETFs) totaled $111 billion in Q2 2017, marking the third straight quarter in which asset net inflows were greater than $100 billion.
  • Estimated net inflows for US Equity ETFs slowed from $43.6 billion in Q1 to $16 billion in Q2, while sector equity ETFs faced $92 million in estimated net outflows in Q2, compared to $19 billion in estimated net inflows in Q1.
  • International Equity ETFs received the greatest level of estimated net inflows in Q2, with $57 billion.  This was a further acceleration from Q1, in which the International Equity ETFs received $33.5 billion.
  • Taxable Bond ETFs received $33.7 billion in estimated net inflows in Q2, nearly the same level of estimated net inflows as in Q1. Estimated net inflows for Municipal Bond ETFs totaled $1.4 billion in Q2, more than double the level of estimated net inflows from Q1.
  • Both Commodities ETFs and Alternatives ETFs received estimated net inflows for the second straight quarter in Q2, totaling $0.9 billion and $1.7 billion, respectively.

¹ Source: Morningstar, as of 6/30/17. Includes all US-listed exchange-traded funds, exchange-traded notes and other exchange-traded products. All net inflow and outflow numbers are estimates based on information provided by Morningstar.

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Posted on Wednesday, August 9, 2017 @ 3:20 PM • Post Link Share: 
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  Municipal Update 2nd Quarter 2017
Posted Under: Municipal
2nd Quarter 2017 Municipal Market Performance and Highlights
  • Municipals outperform in 2Q2017: Municipal market returns were broadly positive in the second quarter of 2017. The Bloomberg Barclays Municipal Bond Index returned 1.96% during the second quarter of 2017 compared to 1.58% in the first quarter of 2017, and outperformed the Bloomberg Barclays Treasury Bond Index by 77 basis points (bps).

  • Pace of Issuance Slows: In the first half of 2017, primary market issuance decreased by 13.3% year-over-year (yoy). The decline in primary market issuance was due to an approximately 26% decline in refunding activity, only partially offset by an increase in new capital issuance.

  • Retail Demand Regains Footing: The last two months of 2016 saw dramatic outflows from municipal mutual funds. In comparison, during the first half of 2017, municipal fund flows were positive during each month, ranging from a positive $854 million to $2.44 billion. Year-to-date, fund flows thru June 21st totaled a robust $11.88 billion.

  • Credit Remains Stable, Despite High-Profile Defaults: As a whole, municipal credit quality remained stable in the first half of 2017. Through June 30, 2017, using MMA data, first-time municipal defaulters totaled just 21 borrowers with a total par value of $18.6 billion, compared to the first half of 2016 when 28 borrowers defaulted on $5.98 billion. According to a Bank of America Merrill Lynch analysis, thru July 5, 2017, Puerto Rico related borrowers accounted for approximately 95.5% of total defaults.

  • Tighter Credit Spreads: During the first half of 2017, credit spreads tightened for both "A" and "BBB" rated municipal securities (see Figure 3 below). We believe "BBB" credit spreads for new bond issues are tighter than the five year historical average.

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Posted on Tuesday, August 8, 2017 @ 8:47 AM • Post Link Share: 
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  Emerging Market Local Currency Review - 2nd Quarter 2017
Posted Under: Emerging Markets

Emerging Market Local Currency bonds continued to perform well through the second quarter. From our perspective, returns were buoyed by improving sentiment across most emerging markets with solid fundamentals attracting investor inflows into the asset class. The quarter saw lower yields as well as stronger emerging market currencies. A few notable political events in countries like Brazil led to a rise in volatility in some countries; however, these seem unlikely to alter the overall improving trend.

The most widely followed emerging market local currency benchmark, the JP Morgan GBI-EM Global Diversified Index (the "Index") returned 3.62% for the second quarter of 2017. The yield on the Index fell 40 basis points (bps) to 6.15% over the period, while the yield on 5yr maturity U.S. Treasury bonds were relatively flat, falling 3 basis point to 1.89%.

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Posted on Thursday, August 3, 2017 @ 3:38 PM • Post Link Share: 
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These posts were prepared by First Trust Advisors L. P., and reflect the current opinion of the authors. They are 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.
 PREVIOUS POSTS
U.S. Investment Grade Credit Investor Update - 2nd Quarter 2017
Second Quarter 2017 CEF Review
Alternatives Update 2nd Quarter 2017
Senior Loan & High Yield Review - 2nd Quarter 2017
Municipal Update 1st Quarter 2017
The Value of Dividend Growth
Emerging Market Local Currency Review - 1st Quarter 2017
First Quarter 2017 CEF Review
Alternatives Update 1st Quarter 2017
U.S. Investment Grade Credit Investor Update - 1st Quarter 2017
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The information presented is not intended to constitute an investment recommendation for, or advice to, any specific person. By providing this information, First Trust is not undertaking to give advice in any fiduciary capacity within the meaning of ERISA and the Internal Revenue Code. First Trust has no knowledge of and has not been provided any information regarding any investor. Financial advisors must determine whether particular investments are appropriate for their clients. First Trust believes the financial advisor is a fiduciary, is capable of evaluating investment risks independently and is responsible for exercising independent judgment with respect to its retirement plan clients.
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