Fixed Income Updateâ¦..
Fixed Income Update…..
July 25th, 2016
Treasury Yields Rise as the Equity Rally Continues Treasury yields rose across the curve last week, but the increase was modest compared to the previous week. Yields only rose by 1 to 3 basis points (bps), led by 2-year maturities. The week-over-week change masks ongoing volatility, as the yield change reversed directions each day, tracking the change in equity prices. The 2-year Treasury yield reached a post-Brexit high on Wednesday, but remains well below levels seen earlier this year when the market was pricing in a higher likelihood of a 2016 Federal Reserve rate hike.1
Credit Sectors Outperform Treasury yields rose early in the week last week in response to the Turkey coup failure, which decreased the risk-off sentiment in the market.1 In the absence of significant economic data, Treasury market movements were driven by the change in equity prices and, to some extent, oil prices. Crude oil futures closed the week at the lowest point since early May as oil producers increased drilling despite an abundance of supply.1 All domestic sectors posted positive total returns and all sectors, except agency and securitized, outperformed similarduration Treasuries.2 The preferred and high yield sectors delivered the strongest relative returns.2 Within the high yield sector, the commodity-sensitive sectors underperformed due to declining oil prices.2 This underperformance was more than offset by the broad-based outperformance of the other sectors.2 The Global Aggregate Index posted a negative total return but outperformed similar-duration Treasuries, with the corporate sector leading the way.2 The Federal Reserve (Fed) meets this week, but we do not expect the post-meeting statement to provide clarity about forward guidance for future rate hikes. We continue to expect the Fed to remain on hold for the remainder of the year given the uncertainty and volatility in the global markets. We believe that positive domestic growth coupled with the gradual pace of policy normalization should support the credit sectors. We are focused on driving returns using income and security selection within the credit-related sectors of investment grade corporates, high yield bonds and preferred securities.
Strong Municipal Bond Demand Continues Municipal bond prices followed U.S. Treasuries lower last week.2 New issue supply was $8.8 billion last week, which was readily absorbed.3 Fund flows extended their positive streak to 42 weeks, with inflows of $1 billion last week.4 This week’s new issue calendar is light at $6 billion.3New issuance continues to be absorbed and the secondary market remains quiet but firm. New York Metropolitan Transportation Authority issued revenue bonds last week (rated A1/AA-).5 The Authority upsized the issue from $500 million to $863 million, taking advantage of historically low yields. Some maturities subsequently traded in the secondary market at a premium to where they were issued. Traditional high yield municipal bond yields (excluding Puerto Rico) remained unchanged last week, while high grade municipal yields increased 4 to 5 bps on the long end of the yield curve.2Credit spreads have contracted 22 bps since the beginning of the third quarter, but remain attractive on a historical basis.2 We believe high yield municipal bonds offer investors potential for attractive returns due to strong technical trends and broadly improving credit risk. High yield municipal fund flows have been very strong the last several weeks.4 In six of the last seven weeks, flows into high yield municipal bond funds were greater than the 2016 weekly average of $251 million.4 That average has been migrating higher with the recent strong weekly numbers. Fund flows have also been steady and consistent, making them easier for the market to absorb.
U.S. Treasury Market Maturity
Yield
Week % Change
Month-ToDate % Change
Year-To-Date % Change
2-year
0.70
0.03
0.12
-0.35
5-year
1.12
0.01
0.12
-0.64
10-year
1.57
0.01
0.10
-0.70
30-year
2.28
0.02
0.00
-0.73
Source: Bloomberg. As of July 22, 2016. Past performance is no guarantee of future results.
Municipal Market Maturity
Yield To Worst
Week % Change
Month-ToDate % Change
Year-To-Date % Change
2-year
0.59
0.00
0.01
-0.18
5-year
0.88
0.00
-0.01
-0.38
10-year
1.45
0.00
0.10
-0.47
30-year
2.15
0.05
0.13
-0.67
Source: Municipal Market Data. As of July 22, 2016. Yields are for AAA-rated general obligation bonds. Past performance is no guarantee of future results.
Yield Ratios Ratio (%) 10-year AAA Municipal vs Treasury
92
30-year AAA Municipal vs Treasury
94
High Yield Municipal vs High Yield Corporate
76
Source: Bloomberg, Barclays Live, Thompson Reuters. As of July 22, 2016. AAA municipals represented by the MMD scale. The high yield ratio equals the yield-to-worst for the Barclays High Yield Municipal Index divided by the yield-to-worst for the Barclays High Yield Corporate Index. Past performance is no guarantee of future results.
Characteristics and Returns Index
Yield to Worst (%)
Spread Effective Week MonthYear(bps) Duration Returns To-Date To-Date (years) (%) Returns Returns (%) (%)
Municipal
1.66
--
5.71
-0.04
-0.21
4.12
High Yield Municipal
5.01
2981
8.40
0.10
0.82
8.87
High Yield Municipal, ex Puerto Rico
4.24
2211
6.73
0.07
0.37
8.26
Short Duration High Yield Municipal2
5.30
414
3.32
0.02
0.36
5.06
Short Duration High Yield Municipal, ex
3.68
252
3.01
0.12
0.28
4.76
U.S. Aggregate Bond
1.95
513
5.52
0.13
0.16
5.48
U.S. Treasury
1.21
--
6.39
0.13
-0.25
5.10
U.S. Government Related
1.99
773
5.67
0.01
0.17
5.87
U.S. Corporate Investment Grade
2.82
1413
7.53
0.30
0.97
8.73
U.S. Securitized
2.11
303
2.68
0.02
-0.05
3.21
BofA Merrill Lynch U.S. All Capital
4.39
1963
4.48
0.30
1.55
5.76
High Yield 2% Issuer Capped
6.57
5203
4.07
0.28
3.06
12.39
Global Aggregate (unhedged)
1.16
473
6.89
-0.38
-0.97
7.90
Puerto Rico2
Securities Index
1
Yield difference between the Barclays High Yield Municipal Index and the 20-year AAA MMD scale 2 Data is a subset of the S&P Short Duration
Municipal Yield Index that is below investment grade/nonrated. Spread is the yield difference between this subset and the subset rated AAA. 3 Option-adjusted spread to Treasuries.
Source: Morningstar Direct; Barclays Live; Bloomberg. As of July 22, 2016. Past performance is no guarantee of future results. Unless otherwise noted, the index is Barclays. All index returns are shown in U.S. dollars. Yield to worst is the lowest potential yield that can be received on a bond without the issuer actually defaulting. Effective duration (expressed in years) measures the price sensitivity of a fixed-income investment to a change in interest rates, considering that expected cash flows will fluctuate as interest rates change. Index performance is shown for illustrative purposes only. Index returns include reinvestment of income and do not reflect investment advisory and other fees that would reduce performance in an actual client account. All indices are unmanaged and unavailable for direct investment.
Back to top 1
Bloomberg.
2
Barclays Live. The Bond Buyer, July 22, 2016.
3 4 5
Lipper Fund Flows. Market Insight, MMA Research, July 20, 2016.
Any reference to municipal credit ratings refers to the highest rating given by one of the following national rating agencies: S&P, Moody’s or Fitch. Credit ratings are subject to change. AAA, AA, A and BBB are investment grade ratings; BB, B, CCC, CC, C and D are below-investment grade ratings. Barclays Municipal Index covers the USD-denominated tax-exempt bond market. Barclays High Yield Municipal Index covers the USDdenominated, below investment grade tax-exempt bond market. S&P Short Duration Municipal Yield Index tracks the municipal bond market with maturities from 1 to 12 years. Barclays U.S. Aggregate Index covers the U.S. investment grade fixed rate bond market. Barclays U.S. Treasury Index includes public obligations of the U.S. Treasury. Barclays U.S. Government-Related Index includes debt guaranteed, owned and sponsored by the U.S. government; it does not include debt directly issued by the U.S. government. Barclays U.S. Corporate Index is a broad-based benchmark that measures the investment grade, fixed-rate, taxable corporate bond market. Barclays U.S. Securitized Index is a composite of asset-backed securities, collateralized mortgage-backed securities (ERISA eligible) and fixed rate mortgage-backed securities. BofA Merrill Lynch U.S. All Capital Securities Index is a subset of the BofA Merrill Lynch U.S. Corporate Index including all fixed-to-floating rate, perpetual callable and capital securities. Barclays High Yield 2% Issuer Capped Index measures the market of USD denominated, non-investment grade bonds and limits each issue to 2% of the index. Barclays Global Aggregate Unhedged Index measures the performance of global bonds. It includes government, securitized and corporate sectors and does not hedge currency.
One basis point equals .01%, or 100 basis points equal 1%.
The opinions expressed in this report are those of Tony Rodriguez, John V. Miller and Nuveen Asset Management and are not necessarily those held by Ray Shaffer, or LaSalle Financial Group LLC.
July 25th, 2016
Treasury Yields Rise as the Equity Rally Continues Treasury yields rose across the curve last week, but the increase was modest compared to the previous week. Yields only rose by 1 to 3 basis points (bps), led by 2-year maturities. The week-over-week change masks ongoing volatility, as the yield change reversed directions each day, tracking the change in equity prices. The 2-year Treasury yield reached a post-Brexit high on Wednesday, but remains well below levels seen earlier this year when the market was pricing in a higher likelihood of a 2016 Federal Reserve rate hike.1
Credit Sectors Outperform Treasury yields rose early in the week last week in response to the Turkey coup failure, which decreased the risk-off sentiment in the market.1 In the absence of significant economic data, Treasury market movements were driven by the change in equity prices and, to some extent, oil prices. Crude oil futures closed the week at the lowest point since early May as oil producers increased drilling despite an abundance of supply.1 All domestic sectors posted positive total returns and all sectors, except agency and securitized, outperformed similarduration Treasuries.2 The preferred and high yield sectors delivered the strongest relative returns.2 Within the high yield sector, the commodity-sensitive sectors underperformed due to declining oil prices.2 This underperformance was more than offset by the broad-based outperformance of the other sectors.2 The Global Aggregate Index posted a negative total return but outperformed similar-duration Treasuries, with the corporate sector leading the way.2 The Federal Reserve (Fed) meets this week, but we do not expect the post-meeting statement to provide clarity about forward guidance for future rate hikes. We continue to expect the Fed to remain on hold for the remainder of the year given the uncertainty and volatility in the global markets. We believe that positive domestic growth coupled with the gradual pace of policy normalization should support the credit sectors. We are focused on driving returns using income and security selection within the credit-related sectors of investment grade corporates, high yield bonds and preferred securities.
Strong Municipal Bond Demand Continues Municipal bond prices followed U.S. Treasuries lower last week.2 New issue supply was $8.8 billion last week, which was readily absorbed.3 Fund flows extended their positive streak to 42 weeks, with inflows of $1 billion last week.4 This week’s new issue calendar is light at $6 billion.3New issuance continues to be absorbed and the secondary market remains quiet but firm. New York Metropolitan Transportation Authority issued revenue bonds last week (rated A1/AA-).5 The Authority upsized the issue from $500 million to $863 million, taking advantage of historically low yields. Some maturities subsequently traded in the secondary market at a premium to where they were issued. Traditional high yield municipal bond yields (excluding Puerto Rico) remained unchanged last week, while high grade municipal yields increased 4 to 5 bps on the long end of the yield curve.2Credit spreads have contracted 22 bps since the beginning of the third quarter, but remain attractive on a historical basis.2 We believe high yield municipal bonds offer investors potential for attractive returns due to strong technical trends and broadly improving credit risk. High yield municipal fund flows have been very strong the last several weeks.4 In six of the last seven weeks, flows into high yield municipal bond funds were greater than the 2016 weekly average of $251 million.4 That average has been migrating higher with the recent strong weekly numbers. Fund flows have also been steady and consistent, making them easier for the market to absorb.
U.S. Treasury Market Maturity
Yield
Week % Change
Month-ToDate % Change
Year-To-Date % Change
2-year
0.70
0.03
0.12
-0.35
5-year
1.12
0.01
0.12
-0.64
10-year
1.57
0.01
0.10
-0.70
30-year
2.28
0.02
0.00
-0.73
Source: Bloomberg. As of July 22, 2016. Past performance is no guarantee of future results.
Municipal Market Maturity
Yield To Worst
Week % Change
Month-ToDate % Change
Year-To-Date % Change
2-year
0.59
0.00
0.01
-0.18
5-year
0.88
0.00
-0.01
-0.38
10-year
1.45
0.00
0.10
-0.47
30-year
2.15
0.05
0.13
-0.67
Source: Municipal Market Data. As of July 22, 2016. Yields are for AAA-rated general obligation bonds. Past performance is no guarantee of future results.
Yield Ratios Ratio (%) 10-year AAA Municipal vs Treasury
92
30-year AAA Municipal vs Treasury
94
High Yield Municipal vs High Yield Corporate
76
Source: Bloomberg, Barclays Live, Thompson Reuters. As of July 22, 2016. AAA municipals represented by the MMD scale. The high yield ratio equals the yield-to-worst for the Barclays High Yield Municipal Index divided by the yield-to-worst for the Barclays High Yield Corporate Index. Past performance is no guarantee of future results.
Characteristics and Returns Index
Yield to Worst (%)
Spread Effective Week MonthYear(bps) Duration Returns To-Date To-Date (years) (%) Returns Returns (%) (%)
Municipal
1.66
--
5.71
-0.04
-0.21
4.12
High Yield Municipal
5.01
2981
8.40
0.10
0.82
8.87
High Yield Municipal, ex Puerto Rico
4.24
2211
6.73
0.07
0.37
8.26
Short Duration High Yield Municipal2
5.30
414
3.32
0.02
0.36
5.06
Short Duration High Yield Municipal, ex
3.68
252
3.01
0.12
0.28
4.76
U.S. Aggregate Bond
1.95
513
5.52
0.13
0.16
5.48
U.S. Treasury
1.21
--
6.39
0.13
-0.25
5.10
U.S. Government Related
1.99
773
5.67
0.01
0.17
5.87
U.S. Corporate Investment Grade
2.82
1413
7.53
0.30
0.97
8.73
U.S. Securitized
2.11
303
2.68
0.02
-0.05
3.21
BofA Merrill Lynch U.S. All Capital
4.39
1963
4.48
0.30
1.55
5.76
High Yield 2% Issuer Capped
6.57
5203
4.07
0.28
3.06
12.39
Global Aggregate (unhedged)
1.16
473
6.89
-0.38
-0.97
7.90
Puerto Rico2
Securities Index
1
Yield difference between the Barclays High Yield Municipal Index and the 20-year AAA MMD scale 2 Data is a subset of the S&P Short Duration
Municipal Yield Index that is below investment grade/nonrated. Spread is the yield difference between this subset and the subset rated AAA. 3 Option-adjusted spread to Treasuries.
Source: Morningstar Direct; Barclays Live; Bloomberg. As of July 22, 2016. Past performance is no guarantee of future results. Unless otherwise noted, the index is Barclays. All index returns are shown in U.S. dollars. Yield to worst is the lowest potential yield that can be received on a bond without the issuer actually defaulting. Effective duration (expressed in years) measures the price sensitivity of a fixed-income investment to a change in interest rates, considering that expected cash flows will fluctuate as interest rates change. Index performance is shown for illustrative purposes only. Index returns include reinvestment of income and do not reflect investment advisory and other fees that would reduce performance in an actual client account. All indices are unmanaged and unavailable for direct investment.
Back to top 1
Bloomberg.
2
Barclays Live. The Bond Buyer, July 22, 2016.
3 4 5
Lipper Fund Flows. Market Insight, MMA Research, July 20, 2016.
Any reference to municipal credit ratings refers to the highest rating given by one of the following national rating agencies: S&P, Moody’s or Fitch. Credit ratings are subject to change. AAA, AA, A and BBB are investment grade ratings; BB, B, CCC, CC, C and D are below-investment grade ratings. Barclays Municipal Index covers the USD-denominated tax-exempt bond market. Barclays High Yield Municipal Index covers the USDdenominated, below investment grade tax-exempt bond market. S&P Short Duration Municipal Yield Index tracks the municipal bond market with maturities from 1 to 12 years. Barclays U.S. Aggregate Index covers the U.S. investment grade fixed rate bond market. Barclays U.S. Treasury Index includes public obligations of the U.S. Treasury. Barclays U.S. Government-Related Index includes debt guaranteed, owned and sponsored by the U.S. government; it does not include debt directly issued by the U.S. government. Barclays U.S. Corporate Index is a broad-based benchmark that measures the investment grade, fixed-rate, taxable corporate bond market. Barclays U.S. Securitized Index is a composite of asset-backed securities, collateralized mortgage-backed securities (ERISA eligible) and fixed rate mortgage-backed securities. BofA Merrill Lynch U.S. All Capital Securities Index is a subset of the BofA Merrill Lynch U.S. Corporate Index including all fixed-to-floating rate, perpetual callable and capital securities. Barclays High Yield 2% Issuer Capped Index measures the market of USD denominated, non-investment grade bonds and limits each issue to 2% of the index. Barclays Global Aggregate Unhedged Index measures the performance of global bonds. It includes government, securitized and corporate sectors and does not hedge currency.
One basis point equals .01%, or 100 basis points equal 1%.
The opinions expressed in this report are those of Tony Rodriguez, John V. Miller and Nuveen Asset Management and are not necessarily those held by Ray Shaffer, or LaSalle Financial Group LLC.
