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In This List

Defaults Are on the Rise

What the Beige Book Hints About the Fed

Bond Returns Barely Positive in February

Asian Fixed Income: PBOC Has Widened Access to China’s Onshore Bond Market for Foreign Investors

Economy Looking Up

Defaults Are on the Rise

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Jason Giordano

Director, Fixed Income, Product Management

S&P Dow Jones Indices

The March rebalancing of the S&P U.S. Distressed High Yield Corporate Bond Index saw another increase in the number of qualifying constituents.  This marks the eighth increase of this kind in the last nine months.  The index, which is designed to measure securities with an option-adjusted spread greater than or equal to 1,000 bps, is down 35% over the past one-year period as of March 1, 2016.

While the monthly change in constituents saw a net increase of 53 issues, there were actually 137 new issues that entered the index universe.  Seventy issues were removed from the index as a result of improved credit spreads; however, 14 issues were removed from the index due to default.

Of the 14 issues in default, 10 were in the energy sector (five issuers), while four represented the materials sector (four issuers).  Combined with January’s activity, 14 issuers have been removed from the index due to default this year.  In comparison, there were 64 issuers that defaulted in all of 2015.

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New issues added to the index had a total par amount of over 80 billion (approximately 15% of the index value).  The total par value of the index has increased 300% since July 2015.

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Not surprisingly, the energy sector is the leader for both number of issues added and percentage of par amount added to the index.  There were a total of 72 issuers that were added to the index with representation from all 10 sectors.

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The posts on this blog are opinions, not advice. Please read our Disclaimers.

What the Beige Book Hints About the Fed

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David Blitzer

Former Managing Director and Chairman of the Index Committee

S&P Dow Jones Indices

The latest copy of the Beige Book, the Federal Reserve’s survey of the economy, was released today in preparation for the next FOMC meeting on March 15th-16th.  The picture it paints of the economy is far better than what one might assume from the stock market’s recent gyrations – but probably not good enough to support another increase in the Fed funds rate this month.

Residential and commercial real estate are the strong spots in the economy while energy and agriculture are the weak ones. Consumer spending is rising in most places, nonfinancial services are reporting gains and manufacturing is flat to slightly positive. Auto sales are good in most areas. Export activity is hurt by the strong US dollar and lackluster economies among major trading partners.  Recent data support this. Home prices continue to rise and sales of existing homes are strong, consumer spending and personal income in January was better than expected and the Institute of Supply Management index for manufacturing rose in February. Labor markets are reported to be improving, consistent with the ADP payrolls number released this morning. Wage gains vary across the country and prices are generally flat according to the Beige Book.

The Fed’s decision on when to raise interest rates is should it take the generally positive beige book and recent better-than-expected economic reports as a reason to move soon, or should it be worried about the stock market’s two months of turmoil?  The chart puts this into a picture: the steady growth of nonfarm payrolls vs. the S&P 500 ups and downs.

Inflationary expectations are low and the Fed’s principal inflation gauge – the core PCE deflator – is under its target. Nothing in the Beige Book makes a case for an immediate Fed rate hike at the upcoming meeting.  Hopefully the FOMC statement on March 16th will have some hints for the future and be interesting reading.

The posts on this blog are opinions, not advice. Please read our Disclaimers.

Bond Returns Barely Positive in February

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Kevin Horan

Former Director, Fixed Income Indices

S&P Dow Jones Indices

The last few days of February had many wondering whether corporate bond indices would end up closing positive or negative for the month.  The majority of indices closed up for February, but not by much.

Higher-quality corporate bonds, as measured by the S&P 500® Bond Index, posted a 0.83% total return for February and returned 1.18% YTD.  The breakdown between investment grade and high yield was all positive, as the S&P 500 Investment Grade Corporate Bond Index returned 0.79% for the month and 1.22% YTD, and the S&P 500 High Yield Corporate Bond Index returned 1.39% for the month and 0.94% YTD.

The S&P U.S. Investment Grade Corporate Bond Index returned 0.68% for February.  U.S.-issued bonds, as measured by the S&P U.S. Issued Investment Grade Corporate Bond Index, returned 0.81% for the month.  Meanwhile, foreign-issued U.S. dollar bonds, as measured by the S&P U.S. Foreign Issued Investment Grade Corporate Bond Index, returned 0.28% in February, and since it accounts for 25% of the S&P U.S. Issued Investment Grade Corporate Bond Index, the drag down effect for February hurt the overall return.

In the high-yield category, all but CCC and lower and leveraged loans pulled off positive returns for the month.  In February, the S&P 500 High Yield Corporate Bond Index returned 1.39%, while the broader S&P U.S. High Yield Corporate Bond Index returned 0.40%.  Leveraged loans, as measured by the S&P/LSTA U.S. Leveraged Loan 100 Index, underperformed and returned -0.21% for the month and
-0.64% YTD.  After returning -2.75% for 2015 and losing -0.42% in January, leveraged loans are still bearing the brunt of concern over lower credits.

The yield-to-worst of the S&P/BGCantor Current 10 Year U.S. Treasury Index ended the month 18 bps tighter, at 1.75%.  Continued concerns over commodity prices and the pace of economic recovery both domestically and internationally has kept rates lower.  China continues to be a question mark, as the most recent PMI reports point to a deepening slowdown.

Exhibit-1: Total Rate of Return Performance
Total Rate of Return Performance

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Source: S&P Dow Jones Indices LLC. Data as of Feb. 29, 2016. Past performance is no guarantee of future results.  Table is provided for illustrative purposes.

The posts on this blog are opinions, not advice. Please read our Disclaimers.

Asian Fixed Income: PBOC Has Widened Access to China’s Onshore Bond Market for Foreign Investors

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Michele Leung

Former Director, Fixed Income Indices

S&P Dow Jones Indices

On Feb. 24, 2016, the People’s Bank of China announced that offshore commercial banks, insurance companies, securities companies, fund management companies, and pension funds are free to invest in China’s interbank bond market.  Previously, foreign investors could only access China’s onshore bond market through a QFII or RQFII quota.  The removal of the quota system was first implemented for foreign central banks and sovereign wealth funds in July 2015. This new announcement will further encourage the inflows from foreign investors.

In addition, as China’s currency is now part of the International Monetary Fund’s special drawing rights basket, broader use of the renminbi in trade and finance is anticipated.  The global demand for renminbi assets is also expected to continue to grow.

As tracked by the S&P China Bond Index, China’s onshore bond market stood at CNY 38.9 trillion (USD 5.95 trillion) as of Feb. 24, 2016.  The S&P China Bond Index rose 8.05% in 2015 and was up 0.64% as of Feb. 24, 2016 (see Exhibit 1).  The yield-to-maturity was at 3.08% with a modified duration of 4.02 as of the same date.

Exhibit 1: Total Return Performance of the S&P China Bond Index

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The posts on this blog are opinions, not advice. Please read our Disclaimers.

Economy Looking Up

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David Blitzer

Former Managing Director and Chairman of the Index Committee

S&P Dow Jones Indices

Amidst continuing anxiety over financial markets, the U.S. economy turned in some good numbers last week. Fourth quarter GDP was revised upward to 1% real growth from 0.7% with consumer spending up 2.0% at seasonally adjusted real annual rates.  Surveys of forecasters had expected growth to be scaled down to 0.4%. Final sales — GDP excluding inventories – was up at a 1.2% real annual rate.  Residential investment was the stand-out performer, rising at an 8% real annual rate.  Personal income and consumption in January — both up at a 0.5% month pace before adjusting for inflation — beat forecasters’ expectations. Orders for durable goods rebounded strongly from a weak December with strong 5% month on month growth as the non-defense capital goods component was up 3.9% on the month.

Attention will turn to what’s next – the employment report scheduled for March 4th.  One consistent aspect of this economic expansion has been the low number of weekly initial unemployment claims. They continue to run well below 300,000 — the level usually seen as the border between solid growth and possible slowness. Initial claims – the number of people newly out of work filing for unemployment insurance are often cited as a predictor of the unemployment rate. The first chart shows this pattern. Early published forecasts* look for payrolls to rise by about 200,000; much better than the disappointing 151,000 in January but not quite at the recent average of 230,000 per month.  Forecasts suggest the unemployment rate will remain at 4.9%.  Anxiety about the markets will remain, even though both the S&P 500 and oil have so far held above their recent low set on February 11th.

*forecast by Marketwatch

 

The posts on this blog are opinions, not advice. Please read our Disclaimers.