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  U.S. Investment Grade Credit Investor Update - 3rd Quarter 2016
Posted Under: Investment Grade Credit

In our outlook for last quarter we mentioned that we were positive on investment grade corporate bond credit spreads* coming into the third quarter because we believed that a strong technical backdrop would be the primary determinant of how the market would perform. And this was, in fact, the case. Corporate financial fundamentals were decent, but mixed. Credit spreads were attractive to us, though absolute yield levels were well below the five-year average. Nonetheless, market technicals remained incredibly strong. This was due in large part to strong overseas demand for U.S. corporate bonds given their relatively attractive yield compared to foreign bond markets where yields are close to zero, if not negative. Consequently, investment grade corporate bond spreads continued their tightening trend during 3Q2016, reaching year-to-date tights during August before backing off slightly in September. The Bloomberg Barclays US Corporate Index tightened 18 basis points (bps) to end the quarter at an Option-Adjusted Spread (OAS) of 138.1

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1Option-adjusted spread is the spread relative to a risk-free interest rate, usually measured in basis points (bp), 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.
Posted on Tuesday, November 08, 2016 @ 3:00 PM • Post Link Share: 
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  Money Market Reform and the Opportunity for Enhanced Cash ETFs
Posted Under: ETFs

Summary of Q3 2016 Estimated ETF Flows and Trends

  • Overall US listed ETF net inflows totaled $93.1 billion in Q3, accelerating significantly from $34.2 billion in net inflows in the previous quarter.
  • The strongest category for net asset flows was US Equity ETFs, with $45.6 billion in net inflows in Q3, compared to $12 billion in net inflows in Q2.
  • Flows into Taxable Bond ETFs also remained strong in Q3, accelerating to $27.3 billion in net inflows, compared to $13.1 billion in net inflows in Q2.
  • Net asset flows into Sector Equity ETFs turned positive for 2016, as net inflows accelerated to $9.3 billion, compared to $3.3 billion in net inflows in Q2.
  • After two straight quarters of net outflows, International Equity ETFs reversed course with net inflows totaling $4.9 billion in Q3.

All net inflow and outflow numbers are estimates based on information provided by Morningstar.

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Posted on Monday, November 07, 2016 @ 1:01 PM • Post Link Share: 
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  Municipal Update 3rd Quarter 2016
Posted Under: Municipal

3rd Quarter 2016 Municipal Market Performance and Highlights

  • Municipal market returns turned slightly negative for the first time in more than a year and underperformed U.S. Treasuries during the third quarter as rates drifted upward. For the three months ended September 30, 2016, the Bloomberg Barclays Municipal Bond Index generated a total return of -0.30% compared to the Bloomberg Barclays U.S. Treasury Index return of -0.28%. Municipal performance was still solidly positive on a year-to-date basis, however. For the nine months ended September 30, 2016, the Bloomberg Barclays Municipal Bond Index returned 4.01% and the Bloomberg Barclays Non-Investment Grade Municipal Bond Index returned 9.37%.

  • New issue supply increased during the quarter. For the three months ended September 30, 2016, new issue volume topped $112 billion to bring the nine month total to $336.7 billion—approximately 5.7% higher than the pace set during the same period in 2015 after lagging it during the first half of 2016.

  • Retail demand continued to be robust despite slowing in September. A net $15.9 billion flowed into municipal funds during the quarter, marking 52 consecutive weeks of positive net inflows and bringing the year-to-date total through September 30, 2016 to $49.5 billion--more than 11.5 times the amount reported for the first nine months of 2015.

  • Credit fundamentals remained healthy as first time defaults continued to trend lower, setting the stage for at least a fifth consecutive year of stable or positive default trends.

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Posted on Friday, November 04, 2016 @ 1:20 PM • Post Link Share: 
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  Third Quarter 2016 CEF Review
Posted Under: CEFs

The third quarter was another solid period for diversified closed-end fund ("CEF") investors. The average CEF was up 2.37% for the quarter and is now up 13.01% year-to-date. Equity CEFs were positive on average by 3.79%, taxable fixed-income CEFs were up on average 5.04%; municipal CEFs, on the other hand, were lower on average by -0.84% for the quarter. (Source: Morningstar. All data is share price total return data). As I mentioned last quarter, after grinding through a challenging 2015 (particularly the back half of the year), diversified CEF investors have been rewarded with very strong total returns year-to-date (YTD). Many of the factors which benefited several categories of the CEF marketplace the first half of 2016 were also present during the third quarter including: higher equity prices (particularly U.S. equities), continued "Plow Horse" (as our Economics Team phrases it) economic growth in the U.S. economy (which helps to create a positive backdrop for many credit-sensitive CEFs), and high distributions and attractive discounts to net asset values (NAVs). This was particularly true for equity and credit-sensitive categories, which also helped to attract buyers to the secondary market during the quarter.

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Posted on Thursday, November 03, 2016 @ 11:19 AM • Post Link Share: 
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  Emerging Market Local Currency Review - 3rd Quarter 2016
Posted Under: Emerging Markets

The positive momentum continued in the emerging market local currency debt asset class over the third quarter backed by strong investor fund inflows. We view the drivers for this trend to be the relatively cheap valuations, both across asset classes and historically, as well as the improving macro-economic environment spreading through many emerging markets.

As an indication, the most widely followed emerging market local currency benchmark, the JP Morgan GBI-EM Global Diversified index, returned 2.68% for the 3rd quarter and 17.07% year-to-date. The benchmark yield declined 14 basis points (bps) to 6.18% as of the end of the quarter. Over the same period, the yield on 5yr maturity U.S. Treasury bonds rose 15bps to 1.15%.

We believe there continues to be a strong case for adding emerging market exposure in this current environment. Emerging markets are growing faster than their developed market counterparts, and their central banks haven't been forced to print large sums of money and conduct massive quantitative easing programs. This bizarrely appears to place the balance of potential market risks more squarely in developed markets.

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Posted on Friday, October 28, 2016 @ 9:30 AM • Post Link Share: 
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  Senior Loan & High Yield Quarterly Review - 3rd Quarter 2016
Posted Under: Senior Loan

Market Review
In the third quarter of 2016, the BofA Merrill Lynch US High Yield Constrained Index continued its strong recovery, gaining 5.49% and bringing its year-to-date total return to 15.32%. The high-yield market is on pace to post its highest annual total return since emerging from the global financial crisis in 2009. Senior loans had a strong quarter as well, as the S&P/LSTA Leveraged Loan Index generated a 3.08% return bringing its year-to-date total return to 7.72%. The total return for risk assets in the high-yield bond and senior loan markets compare favorably to equity market total returns as measured by the S&P 500 index which was up 3.85% in the third quarter and was up 7.84% year-to-date at quarter end

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Posted on Tuesday, October 25, 2016 @ 10:16 AM • Post Link Share: 
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  Alternatives Update 3rd Quarter 2016
Posted Under: Alternatives

In the third quarter, Alternative Investments ("Alternatives") were a mixed bag with regards to performance. Six of eleven categories had positive returns with the remaining five posting negative returns. The strongest performing categories were primarily focused in the credit markets and the higher equity beta related strategies (hedged equity, event driven). Tangible assets (commodities and real estate) along with short bias equity funds ended sharply in the red, a strong reversal from the 2nd quarter performance. The Managed Futures category continued its malaise as rates remained very low and sustained trends absent. Short bias strategies, which had been one of the top performers earlier in the year, suffered as equity markets rallied, volatility fell and the U.S. markets shrugged off international rumblings with aplomb. Framed another way, the rank order of 3rd quarter returns was very closely aligned with rank order correlation of hedge fund categories to the S&P 500 Index; the higher the correlation, the higher the returns. Managed futures, commodities, and global macro have historically shown low correlations to stocks and bonds. Based upon monthly correlations over the past two years, that relationship is seemingly intact. Other Alternatives categories, while having higher correlations with equities, generally do so with considerably less volatility.

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Posted on Tuesday, October 18, 2016 @ 4:00 PM • Post Link Share: 
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  Broad Commodity ETFs Gain Traction in Q2: Will the Trend Continue?
Posted Under: ETFs

Summary of Q2 2016 Estimated ETF Flows and Trends

  • Overall US listed ETF net inflows totaled $34.2 billion in Q2, slightly accelerating from $32.8 billion in net inflows in the previous quarter.
  • For the second quarter in a row, the strongest category for net asset flows was Taxable Bond ETFs, with $13.1 billion in net inflows in Q2.
  • Flows into US Equity ETFs rebounded in Q2 with $12 billion in net inflows, reversing the $2.1 billion in net outflows from Q1. Flows into Sector
  • Equity ETFs also rebounded in Q2 with $3.3 billion in net inflows, compared to $5.5 billion in net outflows in Q1.
  • For the second straight quarter, Commodity ETFs had relatively strong net asset flows with $6.9 billion in net inflows, a large percentage of which came from precious metals ETFs. However, unlike Q1, the "broad commodity ETFs" subcategory also had a significant increase in net inflows, totaling $770 million. This represents the strongest level of net inflows for broad commodity ETFs since Q1 of 2011.
  • International Equity ETFs reported net outflows totaling $3.8 billion in Q2, marking the second consecutive quarter for net outflows.

All net inflow and outflow numbers are estimates based on information provided by Morningstar.

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Posted on Tuesday, August 16, 2016 @ 12:09 PM • Post Link Share: 
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  Alternatives Update 2nd Quarter 2016
Posted Under: Alternatives

In the second quarter, Alternative Investments ("Alternatives") generally had positive performance with tangible assets (commodities and real estate) posting strong returns. Managed futures was a notable outlier with a negative 2nd quarter, lagging not only other Alternative categories but traditional asset classes as well. Year-to-date, most Alternative categories are keeping pace or outperforming traditional asset classes, with once again tangible assets leading the way. Short bias strategies have had considerable success most likely due to a combination of periodic freefalls in the broader equity markets, increased volatility, and wider dispersion in both sector and single name returns. Lagging categories were primarily focused in the equity markets (hedged equity and equity market neutral). Managed futures, commodities, and global macro historically have shown low correlations to stocks and bonds and based upon monthly correlations over the past two years, this continues to be the case. Other Alternative categories, while having higher correlations with equities, generally do so with considerably less volatility.

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Posted on Tuesday, August 16, 2016 @ 8:27 AM • Post Link Share: 
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  Municipal Update 2nd Quarter 2016
2nd Quarter 2016 Municipal Market Performance and Highlights
  • Positive Performance Continues: For the three months ended June 30, 2016, the Barclays Municipal Bond Index returned 2.62% while the non-investment grade index posted a total return of 5.10%. In comparison, the Barclays U.S. Treasury Index returned 2.10% for the same period. (Source: Barclays)

  • Exceptional Risk-Adjusted Performance: Risk adjusted returns for municipal bonds relative to other asset classes remained attractive during the first half of the year. The Barclays Municipal Bond Index and High Yield Municipal Bond Index returned, on a tax and risk adjusted basis, 8.61% and 4.89%, significantly ahead of other major asset classes. The nearest competitor was high yield corporate debt which returned 1.94% (see Figure 2). (Source: Barclays, Bloomberg)

  • Considerable Demand for Municipal Debt: Retail demand for municipal bonds remained exceptionally robust during the second quarter of 2016.  Municipal fund flows were $18.6 billion in the second quarter of 2016 compared to $2 billion of outflows in the second quarter of 2015. Total inflows year-to-date stand at $33 billion. (Source: Barclays, Investment Company Institute)

  • Supply Grew During the Second Quarter: The pace of new issue supply grew in the 2nd quarter of 2016 by 3% to a total of $122 billion. Supply for the year is now just 2% below last year's and shows clear signs of accelerating, in our opinion. (Source: Barclays, SIFMA)

  • Stable Credit Quality: Just 11 borrowers defaulted for the first time in the second quarter of 2016 compared to 16 during 2015 and 21 in 2014. However, the par value of defaults increased to $3.96 billion from $620 million – nearly entirely because of Puerto Rico. The market has, in our view, appropriately treated Puerto Rico as an outlier and signs of contagion are minimal. (Source: MMA)

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Posted on Friday, July 29, 2016 @ 11:50 AM • 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 2016
Emerging Market Local Currency Review - 2nd Quarter 2016
Second Quarter 2016 CEF Review
Senior Loan & High Yield Review – 2nd Quarter 2016
1st Quarter 2016 Municipal Market Performance and Highlights
Three-Year Anniversary for the Largest Actively Managed High Yield ETF
First Quater 2016 CEF Review
Are Expense Ratios a Dependable Predictor of Returns for Large Cap US Equity ETFs?
Staying the Course with FVD
Robust Growth for Municipal Bond ETFs in 2015
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