As we entered 2018, we believed that inflation expectations were too low given the relative health of the U.S. economy and the tightening labor market. This proved to be accurate as inflation data, specifically wage data, began to show modest signs of improvement in the first quarter. This wage improvement was the primary catalyst for one of the largest upward moves in interest rates since the Taper Tantrum, in May 2013. Interest rates, as measured by the 10-year U.S. Treasury, increased 33 basis points (bps) in the quarter to 2.74% from 2.41% and were up 70 bps from the September low of 2.04%. Notably, the yield touched 2.95% during the quarter but later declined. The bonds most susceptible to changes in interest rates moved lower as rates climbed. These include investment grade corporate bonds, which were down 2.20% over the quarter, and a broader measure of the overall bond market, the Bloomberg Barclays U.S. Aggregate Index which was down 1.46%. Despite equity market volatility and higher interest rates, high-yield bonds and senior loans fared well on a relative basis. High-yield bonds were down 0.92% while senior loans were up 1.45%.

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In addition to the attractive yields on emerging market domestic treasury bonds, the emerging market currency exposure provides an attractive opportunity and is currently one of the more favorable aspects of the asset class, in our opinion. The underlying fundamentals in emerging market countries continue to improve and point to a cyclical upswing as shown by the Markit Emerging Market Manufacturing Purchasing Managers' Index ending the year at 52.2, the highest level that it has reached all year. We also continue to see healthy export growth numbers, increasing foreign exchange reserves and continued gross domestic product growth in the emerging market bellwethers, China, India, Brazil and Russia. We anticipate this cyclical upswing will be supportive of emerging market assets more generally.

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The 4th quarter of 2017 was filled with a lot of green across the performance scoreboard as it capped a great year for risk assets in general, global equities in particular. The news cycle was not disappointing either as it produced a constant stream of attention grabbing highlights on what seemed to be a daily basis. Financial markets saw new highs (equities), new lows (volatility), continued firsts (European BBB corporates selling at negative yields), mania (cryptoassets) and a global shift in tone from the central banks. Equity bears have become an endangered species with the advent of what appears to be a synchronized reawakening of growth across the major economies and a bull market that has the resilience of a tardigrade. Volatility traders could also be added to the endangered species list because you can't trade what isn't there.

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The average closed-end fund (CEF) managed a small gain of 0.18% during the fourth quarter of 2017. With this positive gain for the quarter, the average CEF earned a positive total return in each of the four quarters during 2017. It was a very strong year for the CEF marketplace with the average fund up 11.37% in 2017. This follows another solid year when the average CEF was up 8.59% for 2016. Gains in 2017 were broad based for the year, but the rise in global equity prices helped propel the average equity CEF to a particularly impressive positive return of 16.08%. Fixed-income CEFs benefited from relatively stable long-term interest rates and a low default environment for credit-sensitive securities. Taxable fixed-income CEFs were up on average 10.90% for the year while municipal CEFs were positive by 6.49%. (Source: Morningstar. All data is share price total return throughout this commentary.)

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U.S. equity markets continued their march higher in the fourth quarter with the S&P 500 Index gaining 6.64%. This brought the 2017 full year return to a robust 21.83%. Interest rates, as measured by the 10-yr U.S. Treasury bond, were basically unchanged in the quarter and over the course of the year, closing out at 2.41% having begun the year at 2.44%. With the introduction of new tax legislation that is expected to boost corporate earnings, a weaker U.S. dollar which tends to benefit multinational companies and relatively low interest rates, markets have experienced very little volatility. Overall, the general tone from equities and low volatility provided a firm tailwind for senior loans and high-yield bonds over the course of the year, with senior loans up 4.11% and high-yield bonds up 7.47%

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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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