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  U.S. Investment Grade Credit Investor Update - 1st Quarter 2017
Posted Under: Investment Grade Credit

Market Review


Investment grade credit spreads improved during the first quarter of 2017, with the option-adjusted spread on the Bloomberg Barclays Corporate Bond Index tightening 5 basis points (bps) to 118 over the three month period ending March 31, 2017. This compares to 163 bps at the end of 1Q2016. Significantly, however, credit spreads widened in March after tightening during both January and February. Moreover, the eight month credit spread compression trend came to an end during March as crossover credits (which still have a non-investment grade rating from one of the three major rating agencies) underperformed higher-rated credits for the first time since June 2016. U.S. Treasury performance was likewise muted, with the yield on the benchmark 10-year Treasury falling from 2.445% to 2.388% during the quarter.

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Posted on Wednesday, April 19, 2017 @ 4:28 PM • Post Link Share: 
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  Senior Loan & High Yield Review - 1st Quarter 2017
Posted Under: Senior Loan • High Yield

Macro-Economic Overview

Equity markets led the way in the first quarter of 2017, with the S&P 500 Index up 6.07%. Other risk-asset markets such as emerging markets debt and corporate high-yield debt also performed well, up 3.87% and 2.71%, respectively. The positive backdrop for these asset classes continues to be that the U.S. economy is on solid ground, in our opinion, with unemployment claims near the 2000 decade low, increasing CPI, and Real GDP expansion. The proposed economic agenda under the Trump administration which includes lowering individual and corporate income tax rates, increased infrastructure spending, and reduced regulatory burden on businesses has the potential to accelerate the U.S. growth rate. While implementing the agenda in its entirety and the timing remain uncertain, it has nonetheless buoyed risk markets up to this point (Exhibit 1 & 2: Returns).

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Posted on Tuesday, April 11, 2017 @ 9:31 AM • Post Link Share: 
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  Diversifying Alpha with Strategy ETFs
Posted Under: ETFs
Summary of 2016 ETF Flows and Trends¹
  • Total US-listed ETF Assets stood at $2.6 trillion at the end of 2016, a 19.6% increase from the end of 2015. Total estimated net flows for the year were a record $287 billion, outpacing flows in 2015 by $42 billion.
  • Total Assets increased by more than 25% in four ETF categories, including Commodities ETFs (+31.7%), Municipal Bond ETFs (+29.7%), US Equity ETFs (+26.5%), and Taxable Bond ETFs (+25.9%). 
  • US Equity ETFs and Taxable Bond ETFs dominated estimated net asset flows in 2016, bringing in $140 billion and $86 billion, respectively.  No ETF category had estimated net outflows in 2016.

¹Based on Morningstar data, as of 12/31/16.  Includes all exchange-traded funds, exchange-traded notes, and other exchange-traded products.

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Posted on Thursday, February 09, 2017 @ 1:52 PM • Post Link Share: 
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  Municipal Update 4th Quarter 2016
Posted Under: Municipal

4th Quarter 2016 Municipal Market Performance and Highlights

  • Municipal market returns were decidedly negative for the fourth quarter as U.S. Treasury rates spiked upward immediately following the U.S. presidential election and municipal rates followed. For the three months ended December 31, 2016, the Barclays Municipal Bond Index generated a total return of -3.62% compared to the Barclays U.S. Treasury Index return of -3.84%. In spite of the dramatic increase in rates during the quarter, municipal performance was still positive for 2016. For the twelve months ended December 31, 2016, the Barclays Municipal Bond Index returned 0.25% and the Barclays Non- Investment Grade Municipal Bond Index returned 2.99%.

  • New issue supply decreased during the quarter as refunding activity fell due to the climb in rates. For the three months ended December 31, 2016, new issue volume totaled $105 billion versus $115 billion for the previous quarter to bring the twelve-month total to $446 billion – a 10.7% increase over the total new issue supply of $403 billion for 2015. The new issue volume of $446 billion set a record, breaking the old mark of $433 billion set in 2010.

  • Retail demand turned negative in the 4th quarter. After 10 straight months of inflows (totaling $51 billion), municipal mutual funds and ETFs experienced large outflows starting in November, that continued through year-end. For the quarter ending December 31, 2016, fund outflows totaled $26 billion bringing 2016 fund net inflows to $25.5 billion.

  • Credit fundamentals remained stable, with one caveat. Defaults in 2016, both in number and par value increased, but the increase was primarily attributable to Puerto Rico and its corporate affiliates.

  • By the end of the fourth quarter, higher rates and wider credit spreads resulted in a more attractive investment environment, in our opinion, with 10-year AAA and BBB yields at 2.31% and 3.23% (Municipal Market Data) respectively, which equates to taxable-equivalent yields of 4.08% and 5.70%.

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Posted on Thursday, February 02, 2017 @ 1:52 PM • Post Link Share: 
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  U.S. Investment Grade Credit Investor Update - 4th Quarter 2016
Posted Under: Investment Grade Credit

Market Review

Investment grade credit spreads performed well in the fourth quarter, with the option-adjusted spread on the Bloomberg Barclays Corporate Bond Index tightening 15 basis points (bps) to 123 over the three-month period ending December 31, 2016. This compares to 165 bps at the beginning of the year. In what has become a familiar theme, lower quality outperformed. In fact, the lowest quality portion of investment grade has been the outperformer in every one of the past six months. In stark contrast to credit, however, U.S. Treasuries sold off sharply during the quarter, before recovering slightly into year-end.

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Posted on Tuesday, January 31, 2017 @ 12:58 PM • Post Link Share: 
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  Emerging Market Local Currency Review - 4th Quarter 2016
Posted Under: Emerging Markets

The surprise U.S. presidential election result turned sentiment sharply negative towards emerging market assets over the quarter ended December 31, 2016. The headline rhetoric was negative for trade, negative for the outlook on U.S. interest rates and negative for the foreign policy relations between the United States and a number of emerging market countries. This together with higher yields on U.S. Treasury securities led to heightened volatility for emerging markets over the quarter.

The most widely followed emerging market local currency benchmark, the JP Morgan GBI-EM Global Diversified index returned -6.09% for the 4th quarter but ended the full year 2016 with a respectable return of 9.94%. Notably U.S. treasury yield rose substantially over the quarter; the yield on 5-yr maturity U.S. Treasury bonds rose 78 basis points (bps) to 1.93%. Yields for the JP Morgan GBI-EM Global Diversified Index rose 61 bps to 6.79% over the same period.

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Posted on Tuesday, January 31, 2017 @ 10:32 AM • Post Link Share: 
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  Fourth Quarter 2016 CEF Review
Posted Under: CEFs

2016 Overview

2016 was a very solid year for diversified closed-end fund (CEF) investors with the average fund up 8.59% on a share price total return basis according to Morningstar. Unlike 2015 when most of the gains were limited to municipal CEFs, the gains in 2016 were broad—with many categories posting meaningful total return gains. All equity CEFs were up on average 9.78% and all taxable fixed-income CEFs were up on average 16.68%. Municipal CEFs were only up on average 0.64%. As both LIBOR (London Interbank Offered Rate) and long-term interest rates trended higher the last six months of the year, municipal CEFs struggled and were lower by 10.19% during the last half of 2016 (Morningstar). After lagging in 2015, shorter-duration, credit-sensitive categories really shined in 2016. Indeed, senior loan CEFs were up on average 23.92%, high-yield CEFs were up on average 18.79% and limited duration CEFs were up on average 15.87% on a share price total return basis (Morningstar). As 2017 commences, the good news from my perspective is that even after a very solid year for many categories of the CEF marketplace, there remain several pockets of opportunities and value that I think CEF investors should focus on (see below). Average discounts to net asset value (NAV) remain wide by historical standards. Indeed, according to Morningstar the average fund was trading at a 6.34% discount to its NAV as of 12/31/2016 and only narrowed slightly from the average discount of 7.86% on 12/31/15.

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Posted on Friday, January 27, 2017 @ 9:28 AM • Post Link Share: 
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  Alternatives Update 4th Quarter 2016
Posted Under: Alternatives

In the 4th quarter, Alternative Investment ("Alternatives") returns were for the most part directionally the same as in the 3rd quarter with commodities being a notable exception by switching from negative to positive. The magnitude of returns were, however, generally more muted. Year-to-date, ten of 11 categories had positive returns, though short biased was essentially flat for the year. The performance themes in the quarter were fairly clear cut. Equity beta (event driven, volatility arbitrage, hedged equity), credit (distressed, credit arbitrage), and inflation hedging exposures (commodities) did well, while low/negative beta (equity market neutral, macro, managed futures, short bias) and interest rate sensitive exposures (real estate) struggled. As in the 3rd quarter, returns mostly aligned with the rank order correlation to the S&P 500, with real estate and commodities being exceptions. Real assets (commodities and real estate), which had both done very well in the first half of the year, diverged dramatically in the second half of the year due to their differing interest rate sensitivities amidst a rising rate outlook in the United States. Commodities rallied sharply during the fourth quarter, while real estate headed further into negative territory. Managed Futures continued its elegiac performance posting near bottom returns for the quarter and the poorest returns for the entire year. Managed futures, commodities, and macro have historically shown low correlations to stocks and bonds; thus, they serve as potentially strong portfolio diversifiers. Strategies such as credit arbitrage, event driven, hedged equity, et al., which have higher correlations with equities, provide attractive risk/return profiles through lower volatility. These characteristics may allow investors to broaden their investment choices and create more efficient portfolios. Correlations using monthly returns over the past two years shows these historic relationships remain intact.

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Posted on Monday, January 23, 2017 @ 7:21 AM • Post Link Share: 
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  Senior Loan & High Yield Review – 4th Quarter 2016
Posted Under: Senior Loan

In the 1994 film The Shawshank Redemption, Andy Dufresne, a quiet and intelligent banker, is wrongly convicted for the murder of his wife and is sentenced to life in prison. After the initial shock and despair of his new reality, Andy develops a plan of escape. Dufresne's plan is to use a small rock hammer to chip away at and eventually, over many years, tunnel completely out of his prison cell. Each night Andy would dig and each day he would spread a pocketful of his cell block wall in the prison yard through a hole in his pants pocket so as to avoid detection. Importantly, Dufresne maintained a reticent and humble demeanor, earning him the trust of the Warden and the prison guards who allowed him, against prison rules, to keep a poster of Rita Hayworth hanging over the growing hole in his cell. Dufresne kept a low profile and quietly executed his plan, never losing hope. He did not allow the bleakness of his unfortunate circumstances or the discouragement of the other inmates to distract him from his plan. Eventually, Dufresne was able to successfully escape from Shawshank Prison and flee to Mexico to happily live out the rest of his life.

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Posted on Friday, January 20, 2017 @ 3:34 PM • Post Link Share: 
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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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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
Money Market Reform and the Opportunity for Enhanced Cash ETFs
Municipal Update 3rd Quarter 2016
Third Quarter 2016 CEF Review
Emerging Market Local Currency Review - 3rd Quarter 2016
Senior Loan & High Yield Quarterly Review - 3rd Quarter 2016
Alternatives Update 3rd Quarter 2016
Broad Commodity ETFs Gain Traction in Q2: Will the Trend Continue?
Alternatives Update 2nd Quarter 2016
Municipal Update 2nd Quarter 2016
U.S. Investment Grade Credit Investor Update - 2nd Quarter 2016
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