| Market Commentaries for Third Quarter, 2011 |
 Economic Review & Outlook |
[+/-] summary |
|
The U.S. economy likely improved modestly during the third quarter, but we believe it will experience tepid growth for the foreseeable future. Heightened
uncertainty surrounding the resolution of the European sovereign debt crisis and domestic fiscal policies will continue to create a risk-off environment,
favoring lower levels of active risk in client portfolios. Attractive long-term valuations and volatility may create opportunities to generate excess returns
from active security selection and sector allocation, however, when the European political uncertainties begin to subside.
|
| High Yield Commentary |
[+/-] summary |
|
Throughout the third quarter, the market was dictated by headline news around the potential Greece default and the global economic slowdown.
The high yield market ended the quarter in negative territory, at -1.42% year to date. We continue to recommend an overweight to BB and B rated
bonds over CCC credits. We believe security selection will be the key to outperformance during this volatile time. We would like to reiterate
our recommendation of a marketweight to the high yield asset class.
|
| Private Fixed Income Commentary |
[+/-] summary |
|
According to Aviva Investors data, new issue volume for traditional private fixed income in the third quarter of 2011 was approximately $10 billion,
continuing the robust new issue market for the year. We believe new issuance will remain strong for the rest of the year. New issue volume for traditional
private fixed income is on pace to set a multi-year record.
|
| Investment Grade Commentary |
[+/-] summary |
|
The Barclays U. S. Credit Index underperformed duration-neutral Treasuries by 475 basis points for the quarter. For the remainder of the year,
we expect macro-event-driven headlines to dominate credit spread direction, with a bias for widening. U.S. credit fundamentals and supply/demand
technicals continue to be generally supportive of tighter spreads and attractive valuations, absent the macro headlines. Given the complex solutions
required to stabilize the eurozone, it is difficult to predict with any certainty the ultimate timing and outcome that would return investor focus
to credit fundamentals. As a result, we are maintaining our tactical defensive positioning.
|
| Convertible Securities Commentary |
[+/-] summary |
|
Returns for the S&P 500 fell approximately 14% in the third quarter, while the Barclays U.S. Investment Grade Corporate Bond Index posted a gain of approximately
2.85%. Convertibles slightly underperformed expectations, with a return of just -8.08%. Convertible returns are clearly being affected by a negative equity and
credit environment. Our convertible philosophy remains focused on balanced convertibles, those that exhibit the most potential upside per unit of downside risk.
|
| Core Aggregate Commentary |
[+/-] summary |
|
The U.S. economy likely improved modestly during the third quarter, following the second quarter’s sluggish 1.3% annualized growth rate.
Economic data continues to support our view that U.S. economic growth will remain tepid for the foreseeable future. We expect overall bond
yields to remain relatively low, consistent with steady rates through mid-2013, Operation Twist, sluggish economic growth and relatively
contained inflation expectations. We expect the 10-year Treasury to range between 1.50% and 2.50% over the next six to 12 months.
|
|
| Market Commentaries for Second Quarter, 2011 |
| Economic Review & Outlook |
[+/-] summary |
|
The U.S. economy has experienced sluggish growth during the first half of 2011, but we expect it to resume its moderate growth path during the second
half of the year. We believe stable fundamentals, improving technicals and relatively attractive valuations bode well for future credit and securitized
fixed income performance, and we expect overall bond yields to remain relatively low. We also expect volatility to remain elevated and portfolio risk
positioning to be increasingly important, due to the number of key macro risks affecting the markets.
|
| High Yield Commentary |
[+/-] summary |
|
The end of QE2, weak economic data, uncertainty around the Greek austerity package and rising inflation all overshadowed a strong
first-quarter earnings season. The high yield market returned 1.05% in the second quarter, bringing the year-to-date return to 4.98%.
We believe the rest of 2011 will be driven less by beta and more by idiosyncratic, security-specific risk. We reiterate our recommendation
of a marketweight to the high yield asset class – mainly BB and B rated bonds – with a focus on individual credit selection.
|
| Private Fixed Income Commentary |
[+/-] summary |
|
According to Aviva Investors data, new issuance exceeded $10 billion in the second quarter, and it’s on pace for a multi-year record.
While we expect the pace to slow down modestly, new issuance should remain relatively strong through the second half of 2011.
We expect the average rating of new issues to remain in the BBB range, although higher quality credits will be active issuers, as well.
|
| Investment Grade Commentary |
[+/-] summary |
|
The Barclays U. S. Credit Index underperformed duration-neutral Treasuries by 7 basis points for the quarter. We have a modest bias for
Investment Grade spread tightening for the second half of the year, , supported by strong fundamental credit metrics, encouraging supply/demand
technicals and relatively attractive spread valuation. Starting the third quarter, however, our tactical positioning is more defensive and
risk averse, as macro event-driven headlines skew risk to the downside.
|
| Convertible Securities Commentary |
[+/-] summary |
|
Second-quarter returns for the Standard & Poor’s 500 Index fell a modest 0.39%, while the Barclays U.S. Investment Grade Corporate Bond Index
posted a gain of approximately 2.28%. Convertibles underperformed expectations, with a return of just -0.62%, per the Bank of America Merrill
Lynch Investment Grade Convertible Bond Index. Our convertible philosophy remains focused on balanced convertibles, those that exhibit the
most potential upside per unit of downside risk.
|
| Core Aggregate Commentary |
[+/-] summary |
|
The U.S. economy has experienced sluggish growth during the first half of 2011, but we expect it to resume its moderate growth path during the second
half of the year. We believe stable fundamentals, improving technicals and relatively attractive valuations bode well for future credit and securitized
fixed income performance, and we expect overall bond yields to remain relatively low. We also expect volatility to remain elevated and portfolio risk
positioning to be increasingly important, due to the number of key macro risks affecting the markets.
|
|
| Market Commentaries for First Quarter, 2011 |
| Economic Review & Outlook |
[+/-] summary |
|
U.S. data suggest the economy is on a path of self-sustaining recovery, and we expect growth to proceed at a sustainable pace,
based on improving labor markets, growing business confidence, expanding manufacturing, stable consumption, and exports led by
global growth. We expect annualized GDP in the range of 2.5% to 3.0% for 2011. The impact of quantitative easing, strong
investor risk appetites, improved corporate profits and confidence in the recovery have continued to increase demand for
risk and result in outperformance of higher-beta, risky asset classes, including credit fixed income.
|
| High Yield Commentary |
[+/-] summary |
|
The first quarter of 2011 was filled with macro headline news. The political turmoil in Egypt, unrest in the
Middle East and North Africa, Portugal and Greece ratings downgrades, and a devastating Japanese earthquake and
tsunami all threatened to reverse the market’s positive trajectory. The high yield market proved resilient,
however, returning 3.89%. We believe 2011 will be driven less by beta and more by idiosyncratic, security-specific
risk. We reiterate our recommendation of a marketweight to the high yield asset class – mainly BB and B rated
bonds – with a focus on individual credit selection.
|
| Private Fixed Income Commentary |
[+/-] summary |
|
According to Aviva Investors data, new issue volume for traditional private fixed income in the first quarter
of 2011 was more than $10 billion, exceeding the amount of fourth-quarter issuance. This follows a multi-year
high for private debt issuance in 2010. We expect the pace of new issuance to remain strong through at least
the first half of 2011.
|
| Investment Grade Commentary |
[+/-] summary |
|
Risk assets experienced positive performance during the first quarter. The Barclays U.S. Credit Index outperformed durationneutral
Treasuries by 105 basis points (bps). The 10-year Treasury rate increased by 15 bps to close the year at 3.45%. The spread between
10-year and 2-year Treasuries was relatively unchanged and remained historically steep, at 267 bps.
|
| Convertible Securities Commentary |
[+/-] summary |
|
The first quarter of 2011 presented several well-documented challenges to global markets. Nothing seemed to hold them back, however,
not even a tsunami, a rebel uprising, government bailouts, spiking energy costs or a nuclear meltdown. Investors seemed to brush risk
aside as temporary, embracing a chance to “buy the dip.” Our convertible philosophy remains focused on balanced convertibles: those that
exhibit the most potential upside per unit of downside risk.
|
| Core Aggregate Commentary |
[+/-] summary |
|
U.S. data suggest the economy is on a path of self-sustaining recovery, and we expect growth to proceed at a sustainable pace,
based on improving labor markets, growing business confidence, expanding manufacturing, stable consumption, and exports led
by global growth. We expect annualized GDP in the range of 2.5% to 3.0% for 2011. The impact of quantitative easing,
strong investor risk appetites, improved corporate profits and confidence in the recovery have continued to increase
demand for risk and result in outperformance of higher-beta, risky asset classes, including credit fixed income.
|
|
| Market Commentaries for Fourth Quarter, 2010 |
| Fixed Income Market Review & Outlook |
[+/-] summary |
|
U.S. economic growth is continuing on a path of recovery. We expect an annualized increase in GDP of 2.5% for 2011.
We foresee a moderate improvement in the employment picture, positive corporate earnings, persistent weakness in
housing and a moderate increase in consumer spending, consistent with our overall moderate growth outlook. We
believe strong fundamentals, improved technicals and relatively attractive valuations bode well for credit
performance. With the issuance of Treasuries expected to remain at historically high levels and continued
improvement in economic conditions, we expect yields to increase gradually over the intermediate term.
|
| High Yield Commentary |
[+/-] summary |
|
The fourth quarter ended the year on a good note for the high yield asset class. The Barclays Capital
U.S. High Yield Constrained Index returned 3.22% for the quarter, bringing the annual return to
14.94%. We believe 2011 will be driven less by beta and more by idiosyncratic, security-specific
risk. We would like to reiterate our recommendation of a marketweight to the high yield asset
class – mainly BB and B rated bonds – with a focus on credit selection.
|
| Private Fixed Income Commentary |
[+/-] summary |
|
According to Aviva Investors data, new issue volume for traditional private fixed income in the fourth quarter
of 2010 was approximately $9 billion. Full-year 2010 issuance volume exceeded $40 billion, a significant increase
over 2009 and a multi-year high for private debt issuance. New issuance volume is expected to remain strong through
the first half of 2011, as well.
|
| Investment Grade Commentary |
[+/-] summary |
|
The Barclays U. S. Credit Index outperformed duration-neutral Treasuries for the quarter by 138 basis points.
While we expect continued positive credit returns in 2011, they will be muted compared to those of the last two
years. Retail investors will return to equities, but we expect continued fixed income demand from institutional
investors, with strong investment grade demand coming from pension plans, life insurance companies and Asia.
Spreads will be subject to periods of volatility due to continued concern over European sovereign debt, financial
reforms and event risk.
|
| Convertible Securities Commentary |
[+/-] summary |
|
Strong equity performance once again drove the convertibles market in the fourth quarter. The consumer
discretionary and metals sectors were among the most significant contributors. We expect growth in 2011,
tempered by continued high unemployment and uncertainty around the effects of additional quantitative easing.
We like the defense and health care sectors and are cautious on financials.
|
| Core Aggregate Commentary |
[+/-] summary |
|
U.S. economic growth is continuing on a path of recovery. We expect an annualized increase in GDP of 2.5%
for 2011. We foresee a moderate improvement in the employment picture, positive corporate earnings,
persistent weakness in housing and a moderate increase in consumer spending, consistent with our overall
moderate growth outlook. We believe strong fundamentals, improved technicals and relatively attractive
valuations bode well for spread asset performance. With the issuance of Treasuries expected to remain
at historically high levels and continued improvement in economic conditions, we expect yields to i
ncrease gradually over the intermediate term.
|
|
| Market Commentaries for Third Quarter, 2010 |
| Fixed Income Market Review & Outlook |
[+/-] summary |
|
Our outlook for the U.S. economy calls for growth below 3% through 2011, with alternative scenarios tilted toward downside risk. The Fed is likely to launch another quantitative easing program. In addition, we believe targeted fiscal policy actions will be required to close the output gap and generate sustained growth. The slow-growth environment remains supportive of future credit performance, because businesses remain reluctant to increase leverage, corporate borrowing rates are low, and Fed policy reduces the likelihood of a “double dip” recession.
|
| High Yield Commentary |
[+/-] summary |
|
The Barclays Capital U.S. High Yield Constrained Index returned 6.61% for the quarter – its best performance in a year. The high yield market is up 11.35% year to date. We believe the U.S. economy will continue its slow recovery and that high yield bonds are an attractive asset class. Performance through early 2011will be driven less by beta and more by idiosyncratic risk. We recommend a moderate overweight to the high yield asset class – mainly BB and B rated bonds – and a focus on credit selection.
|
| Private Fixed Income Commentary |
[+/-] summary |
|
According to Aviva Investors data, new issue volume for traditional private fixed income exceeded $7 billion in the third quarter of 2010. While this was a decrease from the $11 billion level in the second quarter, it indicates a relatively strong market for what is typically a seasonally slow period. We expect private debt issuance to remain quite robust for the remainder of 2010.
|
| Investment Grade Commentary |
[+/-] summary |
|
The Barclays U. S. Credit Index outperformed duration-neutral Treasuries for the quarter by 144 basis points. We expect credit to outperform Treasuries slightly in the fourth quarter. Strong company credit fundamentals, coupled with continued demand for credit products, will support spread tightening. Macro-economic risk factors have the potential for creating spread volatility, but we don’t expect them to reduce risk appetites significantly.
|
| Convertible Securities Commentary |
[+/-] summary |
|
The convertible marketplace moved up sharply in the third quarter, as equities advanced. Investor risk appetite increased as well, thanks to the Fed’s signaling further support for more quantitative easing. We continue to like gold, healthcare and consumer staples.
|
| Core Aggregate Commentary |
[+/-] summary |
|
Our outlook for the U.S. economy calls for growth below 3% through 2011, with alternative scenarios tilted toward downside risk. The Fed will likely launch another quantitative easing program. In addition, we believe targeted fiscal policy actions will be required to close the output gap and generate sustained growth. The slow-growth environment remains supportive of future credit performance, while volatility and an uncertain market environment warrant conservative positioning in the short term.
|
|
| Market Commentaries for Second Quarter, 2010 |
| Fixed Income Market Review & Outlook |
[+/-] summary |
|
U.S. economic growth has benefited heavily from government stimulus spending and re-stocking of business inventories. We expect continued economic growth of 2.0% to 3.0%. With heightened volatility and continued uncertainty in Europe, the waters will remain choppy. The fundamental environment remains supportive of future credit performance, while technical market conditions warrant conservative positioning in the short term. Canadian growth will be better, powered by a more resilient consumer, a buoyant housing market and a strong resource economy.
|
| High Yield Commentary |
[+/-] summary |
|
In the second quarter of 2010, the Barclays Capital U.S. High Yield Constrained Index recorded the lowest and first negative quarterly return since 2009 of -0.06%, bringing the year-to-date return to 4.45%. We believe the recent re-pricing of risk has made the valuations of many high yield companies more attractive. With yields at around 9.0%, spreads above historical averages and expectations for default rates to drop below 2.0%, the high yield market sits on a comfortable cushion should investors start de-risking again. In addition, we believe the corporate fundamental outlook will remain positive, and U.S. economic news will continue to be robust. We recommend a moderate overweight to high yield with a focus on BB and B rated bonds.
|
| Private Fixed Income Commentary |
[+/-] summary |
|
According to Aviva Investors data, new issue volume for traditional private fixed income exceeded $11 billion in the second quarter of 2010. This was an increase from the $7 billion level in the first quarter. We expect private debt issuance to remain strong for the remainder of 2010. Investors should continue to see a variety of investment opportunities across industries and countries.
|
| Investment Grade Commentary |
[+/-] summary |
|
The Barclays U. S. Credit Index underperformed duration-neutral Treasuries for the quarter by 233 basis points. Despite solid credit fundamentals, we expect demand for investment grade credit to be muted by risk aversion. We foresee economic growth of a moderate 2.0% to 3.0% over the next 12 to 18 months.
|
| Convertible Securities Commentary |
[+/-] summary |
|
The convertible marketplace retreated in the second quarter – down 5.8% – as underlying equities fell sharply and spreads widened out. Investor appetite for risk has curbed as growth concerns in the U.S. and China have taken center stage along with ongoing European debt problems. We currently like hard assets, specifically gold. We also are overweight in healthcare and defense. We remain underweight in cyclical and financials, because slower growth and high leverage will negatively affect these sectors.
|
| Core Aggregate Commentary |
[+/-] summary |
|
The U.S. continued to benefit from fiscal and monetary stimulus as well as inventory rebuilding in the second quarter of 2010. We expect moderate 2.0% to 3.0% growth in the second half, as the impact of fiscal and monetary stimulus fades and small businesses and households suffer from lack of credit availability.
|
|
| Market Commentaries for First Quarter, 2010 |
| Fixed Income Market Review & Outlook |
[+/-] summary |
|
We expect a sustained economic recovery in North America throughout 2010. Growth is likely to slow later in the year, as the impact from fiscal and monetary stimulus fades and small businesses and households suffer from lack of credit availability. The commercial real estate market will drag down economic growth over the intermediate term. The Canadian recovery is likely to be more stable and self sustaining than the U.S. recovery, due to healthier housing and labor markets and strong resource prices.
|
| High Yield Commentary |
[+/-] summary |
|
Despite having the lowest quarterly return since 2009, the Barclays Capital Global High Yield Constrained USD Hedged Index returned an impressive 5.28% in the first quarter. We believe high yield is attractive based on strong yields (at over 8%), potential further spread compression and a declining default rate over the next 12 months. In addition, the economic backdrop is improving, inflation remains at very low levels, and the Fed has continued its accommodative monetary policy. We recommend a moderate overweight to high yield with a focus on BB and B rated bonds.
|
| Private Fixed Income Commentary |
[+/-] summary |
|
According to Aviva Investors data, new issue volume for traditional private fixed income exceeded $5 billion in the first quarter of 2010. This was a decrease from the sizeable $8 billion level in the fourth quarter of 2009. We expect private debt issuance to remain strong for the remainder of 2010. Investors should continue to see a variety of investment opportunities across industries and countries.
|
| Investment Grade Commentary |
[+/-] summary |
|
The Barclays U.S. Credit Index outperformed duration-neutral Treasuries by 113 basis points (bps) in the first quarter. All major credit sectors generated positive excess returns versus Treasuries. Financials led the way, with 171 bps of excess return. Non-corporates generated 106 bps of excess return, followed by utilities at 93 bps. Lower-quality credits compressed to higher-quality credits, and financials compressed to industrials – both trends that we expect to continue. We will maintain overweights to financials, particularly banks and insurance. We also continue to overweight BBBs versus As or AAs.
|
| Convertible Securities Commentary |
[+/-] summary |
|
The convertibles market performed well in the quarter, with a return of 5.6%, driven by underlying equity performance and spread tightening. The market has continued the trend of the last several quarters, as risk appetite continues to increase and investors search for returns in an ultralow interest rate environment. We remain somewhat defensive and look for companies that don’t require significant U.S. or worldwide growth to be successful. We like healthcare, defense, gold and some energy sectors.
|
| Core Aggregate Commentary |
[+/-] summary |
|
The U.S. has benefited heavily from fiscal and monetary stimulus as well as inventory rebuilding in the first quarter of 2010. We expect slower growth in the second half, however, as the impact of fiscal and monetary stimulus fades and small businesses and households suffer from lack of credit availability. We continue to see opportunities to profit from tighter spreads in credit and securitized markets, but we expect returns to increasingly be driven by security selection and industry allocation as opposed to broad systematic market movements.
|
|
| Market Commentaries for Fourth Quarter, 2009 |
| Fixed Income Market Review & Outlook |
[+/-] summary |
|
The U.S. should benefit heavily from fiscal stimulus and inventory rebuilding in the first half of 2010, resulting in a short-lived V-shaped recovery. We expect slower growth in the second half, however, as the impact of fiscal stimulus fades and small businesses and households suffer from lack of credit availability. The Canadian economic recovery is likely to be stronger than the U.S. recovery, supported by healthier housing and labor markets and strong resource prices.
|
| High Yield Commentary |
[+/-] summary |
|
The Barclays Capital Global High Yield Constrained Index turned in its fourth consecutive quarter of positive returns, at 6% for the fourth quarter of 2009, ending the year at 62.33% and easily offsetting 2008’s worst-year record of -38.4%. Going into 2010, we expect that declining default rates, tightening spreads, ample money supply, a strong primary market and the risk of rising interest rates will position the high yield asset class attractively against other classes. We recommend a moderate overweight to high yield with a focus on BB and B rated bonds and credit selection.
|
| Private Fixed Income Commentary |
[+/-] summary |
|
According to Aviva Investors data, new issue volume for traditional private fixed income in the fourth quarter of 2009 was approximately $8 billion. This was a sizeable increase from the $6 billion issuance level in the third quarter. Private debt issuance is expected to be strong in the first half of 2010, as well. Investors should continue to see attractive terms and strong covenants.
|
| Investment Grade Commentary |
[+/-] summary |
|
The Barclays U.S. Credit Index delivered 267 basis points of excess return for the quarter on 41 bps of spread tightening. The energy and finance sectors were the best-performing sectors. The worst performers for the quarter were higher quality non-corporates, including supranationals and foreign local governments. For 2010, we recommend a moderate overweight to investment grade corporate bonds, and we expect spread tightening to continue due to improved fundamental conditions, supportive technical factors and attractive valuations.
|
| Convertible Securities Commentary |
[+/-] summary |
|
The convertible market performed very well in the fourth quarter, delivering a 6% return. This ongoing trend upward was driven by increasing risk appetites, underlying stock prices, tightening credit spreads and associated inflows to the strategy. Considering an uncertain recovery trajectory, we remain somewhat defensive in our approach to portfolio construction. We generally favor hard assets, healthcare and energy services and will remain underweight to financials, consumer discretionary and industrials. Any increasing volatility in the market – along with attractive secondary pricing – will make this category appealing in 2010.
|
| Core Aggregate Commentary |
[+/-] summary |
|
The U.S. should benefit heavily from fiscal stimulus and inventory rebuilding in the first half of 2010, resulting in a short-lived V-shaped recovery. We expect slower growth in the second half, however, as the impact of fiscal stimulus fades and small businesses and households continue to suffer from a lack of credit availability. While fixed income credit spreads have tightened substantially from record wide levels, they remain attractive relative to long-term averages. We continue to see opportunities to profit from tighter spreads in credit and securitized markets.
|
|
| Market Commentaries for Third Quarter, 2009 |
| Economic Review & Outlook |
[+/-] summary |
|
North American economic growth likely turned positive in the third quarter of 2009, following four straight quarters of negative GDP growth. We are seeing signs of stability in the housing market, and government stimulus programs have given life to consumer spending. Capital markets continued to rally, as liquidity and the outlook for the economy improved, but the markets are likely to remain volatile in the near future.
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| High Yield Commentary |
[+/-] summary |
|
Following a record-breaking second quarter, the U.S. high yield market returned 14.21% for the third quarter, as reflected by the Barclays Capital U.S. High Yield 2% Issuer Capped Index. The U.S. high yield market has more than recovered its 25.88% loss in 2008, returning close to 50% year to date. We expect continued volatility in the last quarter and into 2010, as the pace of economic recovery will be slow and drawn out, and consumer activity remains constrained by unemployment and increased savings.
|
| Private Fixed Income Commentary |
[+/-] summary |
|
We expect private debt issuance to be strong in the fourth quarter of 2009 as issuers take advantage of lower Treasury rates, lower spreads and higher investor demand. We expect new issuance to be more in the BBB ratings range, in a wider variety of sectors and from a variety of countries in the fourth quarter. Investors should continue to see attractive terms and strong covenants.
|
| Investment Grade Commentary |
[+/-] summary |
|
The Barclays U.S. Credit Index tightened 86 basis points, providing excess return of 498 basis points for the quarter. According to Barclays, this was the second best quarterly performance ever. The best-performing industries were led by financials, and the worst were the lower-beta, higher-quality sectors. Looking toward yearend, we expect investment grade credit to outperform Treasuries, but at much more muted levels than we experienced in the last two quarters. We would expect investors to stay “closer to home” to preserve their 2009 performance.
|
| Convertible Securities Commentary |
[+/-] summary |
|
The convertible marketplace performed very well in the third quarter, driven primarily by equity returns. Spread tightening and richening also were positive contributors as the return of risk appetite among investors continued. New issuance, at just $2.7 billion for the quarter, was disappointing but has picked up in recent weeks, and market dynamics would support larger issuance. We believe that the high level of federal deficit spending and underlying trends in housing and unemployment make a sustainable recovery unlikely in the near future. We expect increased volatility in late October or early November, which will benefit the valuation of convertibles.
|
| Core Aggregate Commentary |
[+/-] summary |
|
The Barclays Capital U.S. Aggregate Index outperformed duration-adjusted Treasuries by 198 basis points in the third quarter, with an absolute return of 3.74%. As the economic outlook improved and cash flows into risky assets increased, risk appetites continued to increase and liquidity improved. This led to a tightening of spreads across all asset classes and positive returns relative to U.S. Treasuries. We believe that investment grade and high yield corporate bonds, along with commercial mortgage-backed securities, will continue outperforming Treasuries in the fourth quarter.
|
|
| Market Commentaries for Second Quarter, 2009 |
| Fixed Income Market Review & Outlook |
[+/-] summary |
|
Economic data began showing signs of a recovery throughout the second quarter. Growth is expected to turn positive in the second half of 2009 with a boost from inventory restocking, which was drawn down considerably in the first half of the year. Weakness continues in the housing and labor market, but consumer confidence and spending stabilized and began to turn higher. Many of these increases will likely be short lived, however, because they were spurred by one-time stimulus payments.
|
| Canadian Market Review & Outlook |
[+/-] summary |
|
The North American economy remained weak in the second quarter, as negative real GDP and contracting employment persisted, and housing prices continued to fall. Despite these negative indicators, talk of economic “green shoots” began to sprout in market rhetoric. North American bond markets continued to sell off in the second quarter, as 10-year U.S. and Canada bond yields increased by 87 basis points (bps) to 3.53% and 58 bps to 3.36%, respectively. Government bonds suffered, as the flight to quality faded and the demand for stocks, commodities, non-government bonds and other risky assets increased.
|
| High Yield Commentary |
[+/-] summary |
|
After finishing a very strong first quarter, the global high yield market posted solid returns again in the second quarter (24.23%), making this the best quarter in the history of the Barclays Capital Global High Yield Constrained Index. The rally that began in mid-December 2008 continued through June and resulted in a six-month return of 32.52%. April was the best month on record, when the index soared 11.47%. The market has cooled down since then, but still managed to return 7.95% for May and 3.23% for June.
|
| Private Fixed Income Commentary |
[+/-] summary |
|
New issue volume for traditional private fixed income was approximately $5 billion for the second quarter of 2009, following a $4 billion first quarter. New issuance, with an average quality of BBB+, was distributed over a variety of stable sectors, including food and beverage, utilities, energy and government services. Spreads continued relatively wide compared to historical levels. We expect private debt issuance to accelerate in the second half of 2009, as issuers continue adjusting to the lending environment.
|
| Investment Grade Commentary |
[+/-] summary |
|
The Barclays U.S. Credit Index turned in excess return of 1,187 basis points for the quarter, with all sectors ending on a positive note. Lower-quality BBBs have performed best, while higher-quality issues underperformed the index. We continue to take a constructive view of investment grade credit and remain confident that it will outperform Treasuries over the next six months. The magnitude of performance may be muted, however, compared to the massive outperformance in the first half of the year.
|
| Convertible Securities Commentary |
[+/-] summary |
|
The convertible marketplace advanced from rising underlying equity prices and credit spread tightening. As consensus has shifted to a second-half recovery, investors have been quick to add risk to their portfolios. While some predict a return to normalcy later this year, it seems unlikely to us, because the employment situation is abysmal and likely to remain depressed through next year. We believe convertibles will offer investors an opportunity to benefit from expected increases in volatility and a robust issuance calendar.
|
| Core Aggregate Commentary |
[+/-] summary |
|
The Barclays Capital U.S. Aggregate Index outperformed duration-adjusted Treasuries by 365 basis points in the second quarter, with an absolute return of 1.78%. As risk appetites increased, spreads across all asset classes tightened, leading to positive returns relative to U.S. Treasuries. We believe that investment grade and high yield corporate bonds will keep generating excess returns versus Treasuries, and securitized asset classes will continue to benefit from government-sponsored programs, though not as dramatically as they did in the second quarter.
|
|
| Market Commentaries for First Quarter, 2009 |
| Fixed Income Market Review & Outlook |
[+/-] summary |
|
The ramifications of the financial crisis spread further into the real economy, which caused the labor market, housing, consumption, manufacturing and exports to deteriorate further. As bad as the economic data has been throughout the first quarter, the environment has shown some signs of stabilization. Our outlook calls for economic readings to remain weak in the near term, but to improve during the second half of 2009.
|
| Canadian Market Review & Outlook |
[+/-] summary |
|
Although the economy continued to suffer in the first quarter, fixed income markets showed some signs of stability, as bond yields traded in a steady range, and corporate bond spreads tightened. Our outlook calls for economic readings to remain weak in the near term, but to improve during the second half of 2009, and we expect credit spreads to tighten through the end of 2009.
|
| High Yield Commentary |
[+/-] summary |
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After a very challenging 2008 in high yield (and most asset classes), this market has posted a very strong start to 2009. We see signs that demand is coming back into the market, as evidenced by inflows in the quarter. The high yield asset class posted a return of 5.98% in the quarter, lessening the losses that gained traction early in the third quarter of 2008 and, according to Barclays Capital, resulted in 2008 returns of -26.16%.
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| Private Fixed Income Commentary |
[+/-] summary |
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Approximately $4 billion of traditional private fixed income was issued in the first quarter of 2009. Volume increased markedly, compared to the $560 million of issuance in the fourth quarter of 2008. Private debt issuance should continue to increase in the second quarter of 2009, as issuers adjust to the new financial and economic environment.
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| Investment Grade Commentary |
[+/-] summary |
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US credit markets got off to a strong start in January. February and March proved to be more challenging because credit markets were under pressure as equities dropped. From a fundamental perspective, we expect continued deterioration during the next six months. The pace of deterioration should begin to abate, however, as companies complete their downsizing activities to meet reduced business demand.
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| Convertible Securities Commentary |
[+/-] summary |
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The first quarter of 2009 was another volatile period for the equity markets, as many concerns that plagued them in 2008 continued. The convertible marketplace improved, both in performance and issuance. We expect volatility to remain elevated over the near term but trend down over the longer term if credit markets can stabilize.
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