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  Senior Loan & High Yield Review – 1st Quarter 2018
Posted Under: Senior Loan
Macro Overview

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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Posted on Thursday, April 19, 2018 @ 2:12 PM • Post Link Share: 
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  Alpha, Expenses, and the Shift from Active to Passive
Posted Under: ETFs
Summary of 2017 ETF Flows and Trends¹
  • Total US-listed ETF Assets reached $3.44 trillion at the end of 2017, a 34.6% increase from the end of 2016.  Total estimated net flows for the year were $465 billion, outpacing 2016's record-setting flows by $178 billion.
  • Total Assets increased by ≥ 25% in five ETF categories, including International Equity ETFs (+60%), US Equity ETFs (+32%), Taxable Bond ETFs (+30%), Sector Equity ETFs (+25%), and Municipal Bond ETFs (+25%).
  • International Equity ETFs had the strongest estimated net inflows in 2017 ($149 billion), followed by US Equity ETFs ($143 billion), and Taxable Bond ETFs ($121 billion).  No ETF category had estimated net outflows in 2017.

¹ Source: Morningstar, as of 12/31/17. 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, February 14, 2018 @ 8:42 AM • Post Link Share: 
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  Municipal Update 4th Quarter 2017
Posted Under: Municipal
4th Quarter 2017 Municipal Market Performance and Highlights
  • Municipals outperform in 4Q2017: Municipal market returns were broadly positive in the fourth quarter of 2017. The Bloomberg Barclays Municipal Bond Index returned 0.75% during the fourth quarter of 2017 compared to 1.06% in the third quarter of 2017, and outperformed the Bloomberg Barclays U.S. Treasury Bond Index by 70 basis points (bps), which generated a return of 0.05% in the fourth quarter of 2017. For all of 2017, the Bloomberg Barclays Municipal Bond Index had a total return of 5.45%, compared to the Bloomberg Barclays U.S. Treasury Bond Index return of 2.31%.
  • Tax Reform and Fed Activity: Healthy U.S. economic fundamentals, an unsettling geopolitical landscape and the continuance of global quantitative easing (QE) programs between the European Central Bank (ECB) and Bank of Japan (BOJ) were contributing factors in the global rates markets and U.S. Treasury bond prices in the fourth quarter. Additional influences were the passage of tax reform and U.S. Federal Reserve activity, including the continuation of rate normalization to the upside and the beginning of balance sheet downsizing. At December 31, 2017, the 10-year U.S. Treasury yield stood at approximately 2.40%, representing a 7 basis point increase from 2.33% at September 30, 2017.
  • Municipal Issuance Explodes Higher as Tax Reform Proposals Restrict Issuance: In the fourth quarter of 2017, primary market municipal bond issuance increased by a monstrous 39.8% year-over-year. New issue supply was greatly aided by December's record supply of over $64 billion (versus the average over the past two Decembers of $22 billion), as issuers rushed to market in the face of tax reform eliminating advance refunding of municipal bonds on a tax-exempt basis. While private activity bond's (PAB) tax exemption was left unchanged, the threat of repeal ushered in a wave of issuance by hospitals, colleges, and universities, among other industries. New issue supply totaled $439 billion for the year, only 2% lower than a year ago when the market had record supply ($446 billion in 2016).
  • Retail Demand Stays Consistently Positive: Retail demand for the fourth quarter totaled $2.1 billion versus $8.8 billion for the third quarter of 2017. Total net inflows for 2017 were $24.1 billion, 5.6% less than 2016's total net inflows of $25.5 billion. Municipal fund flows were positive during each of the first eleven months of 2017, ranging from a positive $873 million to $3.8 billion, and turned negative in December with outflows of $1.3 billion.
  • Credit Trends were Positive, Despite High-Profile Defaults: As a whole, municipal credit quality trends remained favorable in 2017. Through December 31, 2017, using Municipal Market Analytics (MMA) data, first-time municipal defaulters totaled just 43 borrowers compared to 2016 with 69 borrowers. According to MMA data, 2017 default numbers indicate a record low number of defaulting borrowers going back to when the data was first available in 2009. Moody's credit rating upgrade vs. downgrade ratios also suggest favorable credit trends, with the number of credit rating upgrades exceeding downgrades in two of the first three quarters of 2017, including the quarter ended September 30, 2017.
  • Tighter Credit Spreads: During the fourth quarter of 2017, credit spreads continued to tighten for both "AAA" and "BBB" rated municipal securities in the 10 year through 30 year part of the curve. We believe "BBB" credit spreads for new bond issues are tighter than their five-year historical average.

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Posted on Tuesday, February 13, 2018 @ 8:29 AM • Post Link Share: 
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  Emerging Market Local Currency Review - 4th Quarter 2017
Posted Under: Emerging Markets
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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Posted on Monday, February 5, 2018 @ 9:08 AM • Post Link Share: 
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  Alternatives Update 4th Quarter 2017
Posted Under: Alternatives
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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Posted on Monday, January 22, 2018 @ 9:50 AM • Post Link Share: 
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  Fourth Quarter 2017 CEF Review
Posted Under: CEFs
Fourth Quarter and 2017 Overview

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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Posted on Monday, January 22, 2018 @ 8:00 AM • Post Link Share: 
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  Senior Loan & High Yield Review
Posted Under: Senior Loan
Macro Overview

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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Posted on Tuesday, January 16, 2018 @ 2:33 PM • Post Link Share: 
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  Actively Managed Fixed Income ETFs Gain Marketshare
Posted Under: ETFs
Summary of Q3 2017 ETF Flows and Trends¹
  • Estimated net inflows for US-listed ETFs totaled $87 billion in Q3 2017, bringing total ETF assets to $3.17 trillion.
  • Taxable Bond ETFs received the greatest level of estimated net inflows, totaling $31.5 billion in Q3, slightly less than the previous quarter.  Estimated net inflows for Municipal Bond ETFs totaled $1.4 billion in Q3, nearly matching flows from Q2.
  • International Equity ETFs received $24.7 billion in estimated net inflows in Q3, as flows decelerated from $57.0 billion in Q2.  Year-to-date, the International Equity ETF category has received the greatest level of estimated net inflows, totaling $115 billion.
  • Equity ETFs received $22.6 billion in estimated net inflows in Q3, accelerating from $15.3 billion in Q2, while sector equity ETFs received $5.5 billion in estimated net inflows, accelerating from $0.8 billion in Q2.
  • Commodities ETFs (+$0.6 billion), Allocation ETFs (+0.5 billion), and Alternatives ETFs (+$0.4 billion) each received positive estimated net inflows in Q3, although estimated net inflows for each were weaker than Q2.
¹ Source: Morningstar, as of 9/30/17. 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 Friday, December 1, 2017 @ 9:51 AM • Post Link Share: 
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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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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
High-Yield Spreads and Time Walk Hand in Hand
U.S. Investment Grade Credit Investor Update - 3rd Quarter 2017
Alternatives Update 3rd Quarter 2017
Third Quarter 2017 CEF Review
Senior Loan & High Yield Review - 3rd Quarter 2017
Prospects Improve For European Equity ETFs
Municipal Update 2nd Quarter 2017
Emerging Market Local Currency Review - 2nd Quarter 2017
U.S. Investment Grade Credit Investor Update - 2nd Quarter 2017
Second Quarter 2017 CEF Review
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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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