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The Rieger Report: Puerto Rico's 2015 Impact- $7.5 billion

The Rieger Report: Junk Bond Risk Realized as Credit Spreads Jump

The Rieger Report: S&P 500 Has Outperformed S&P 500 Bond Index 7 of last 9 Years

New ESG concepts evolved; Decarbonization was the word in 2015

The Rieger Report: Apple Inc.: Stock & Bonds Move on Different Tracks

The Rieger Report: Puerto Rico's 2015 Impact- $7.5 billion

Contributor Image
J.R. Rieger

Head of Fixed Income Indices

S&P Dow Jones Indices

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As the fiscal saga continues for Puerto Rico and it’s residents the impact has been crushing for the bond holders in 2015.  The total market value of bonds tracked in the S&P Municipal Bond Puerto Rico Index has fallen by over $7.5billion.

Chart 1: Total Market Value of Bonds in the S&P Municipal Bond Puerto Rico Index 2015

Puerto Rico Market Value 12 2015

Source: S&P Dow Jones Indices, LLC.  Data as of December 22, 2015.

Yields for bonds in the S&P Municipal Bond Puerto Rico Index have ended at 9.62% which is 205 basis points cheaper than year end 2014.  Prices of bonds in the index have been volatile to the down side for most of the year and yields reached their cheapest point on June 29th when they got as high as 9.9%.

Chart 2: Select Municipal Bond Index Yields (Yield to Worst)

Puerto Rico Yields 12 2015

Source: S&P Dow Jones Indices, LLC.  Data as of December 22, 2015.

Some aspects about the index that impact this result:

  • Defaulted bonds remain in this index
  • Bonds that have matured that were not in default are removed from the index
  • News issues are added based on inclusion criteria

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

The Rieger Report: Junk Bond Risk Realized as Credit Spreads Jump

Contributor Image
J.R. Rieger

Head of Fixed Income Indices

S&P Dow Jones Indices

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The relentless drive for yield has caught up with U.S. high yield bond investors.  Junk bond holders have been beaten up by the one risk they did not want to see:  credit spreads widening.  High yield bonds have seen compressed yields for some time as the relentless drive for yield had shifted flows toward yield producing assets.  Unfortunately, that segment of the bond market has endured sector risk (energy and materials) as well as signs the default rate is rising back toward historical norms.

Credit spreads of bonds in the S&P 500 Bond Index have jumped.   Yields of bonds in the S&P 500 BB High Yield Bond Index have risen 165 basis points since July 1st driving the total return down by over 5.3% during that time.

Chart 1: Select index yields (Yield to Worst)

Index Yields 12 21 2015

Source: S&P Dow Jones Indices, LLC.  Data as of December 21st, 2015.

As yields rise, bond prices have fallen erasing gains seen earlier in the year.  Year-to-date total return for the S&P 500 BB High Yield Corporate Bond Index is – 4.4%.

Table 1: Select index Year-to-Date Returns:

Returns 500 quality 12 2015

Source: S&P Dow Jones Indices, LLC.  Data as of December 21st, 2015.

The energy and materials sectors of the bond markets have been a real drag on performance on the junk bond markets as bond prices have fallen.  The S&P 500 Energy Bond Index is down 9% year-to-date and the S&P 500 Materials bond Index is down over 4.8% year-to-date.

Table 2: Select Bond Sector Indices Year-to-date Returns:

Sector Returns 500

Source: S&P Dow Jones Indices, LLC.  Data as of December 21st, 2015.

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

The Rieger Report: S&P 500 Has Outperformed S&P 500 Bond Index 7 of last 9 Years

Contributor Image
J.R. Rieger

Head of Fixed Income Indices

S&P Dow Jones Indices

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Blue chip stocks have seen dramatic twists and turns over the past 10 years creating opportunity and angst for investors.  The bonds of these same companies have been less volatile and perhaps a bit boring.  The result has been that the S&P 500 has outperformed the S&P 500 Bond Index 7 of the last 9 years.  A closer look at those returns over a 10 year period show they actually are quite close.

Annual Returns 500 & 500 Bond

Looking at the 10 year annualized returns of stocks and bonds of the blue chip companies in the S&P 500 Index have been similar:

  • The 10 year annualized returns of the S&P 500 Bond Index and the S&P 500 Index are only 147bps apart.
  • Annualized risk adjusted returns taking into account the volatility of each asset class show a annualized 50bp return difference for the 10 year period and a 3bp difference in the 5 year return.

Annualized 500 Bond v Equity

When looking at the annualized risk adjusted returns which take into account volatility in each asset class the returns of blue chip stocks and bonds are very close.

Annualized Risk Adjusted Returns:

500 Bond v Equity

 

 

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

New ESG concepts evolved; Decarbonization was the word in 2015

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Julia Kochetygova

Head of Sustainability Indices

S&P Dow Jones Indices

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New concepts of ESG are evolving
The biggest shift since the beginning of 2015 has been that the asset owner ideology has changed to involve concepts such as “Impact Investing”, “Natural Capital”, and “Universal Owner”. We have seen initiatives from pension investors that provoked a visible shift away from a purely financial viewpoint to one where longer-term stakeholder value is critical, for example:

  • One of Sweden’s largest pension plans, AP4’s decarbonization strategy
  • France’s public service pension scheme, ERAFP’s proactive ESG integration
  • France’s public pension reserve fund, FRR’s tender for the asset manager who is able to deliver value from ESG, and
  • Canada’s largest pension plan, CPPIB’s initiative to focus investment objectives entirely on long-term performance

In this model, more integrated approaches to ESG and better stewardship exercised over ownership will be present, as highlighted in the Towers Watson Report published in February 2015.

There are more and more investors who are actively considering ESG as a risk factor: reputational, as well as financial. Mercer European Study 2015 has stated that those who do not consider such risks now represent 36% versus 48% in 2014. And there is more evidence coming from index providers and their analytical partners showcasing that ESG has actually been able to deliver alpha. RobecoSAM has been able to identify these trends by quantifying the impact of ESG separately from all other factors (see their “Smart ESG Integration” whitepaper published in September).

Climate change talks dominated sustainability discussion in 2015 as COP21 approached
Finally, as we approached COP21 in Paris this year, the core of sustainability discussion was increasingly centered on climate change, which has received a consensus priority status as both the most important and the most pressing subject. The Montreal Carbon Pledge that was adopted in September 2014, whereby signatories agree to measure and publicly disclose the carbon footprint of investment portfolios annually, has reached $10 trillion of assets by the time of COP21, and the Portfolio Decarbonization Coalition whereby members will drive GHG emissions reductions on the ground by decarbonizing their portfolios has accumulated $600 billion. The Mercer report “Investing in the time of Climate Change” presented a very solid and quantified investment case, with Coal and Oil industries being the biggest losers under various climate scenarios and Renewable Energy being the only winner.

2015 saw investors divesting from fossil fuels and green projects were on the rise
Many asset owners have been divesting from fossil fuels, particularly coal. Coupled with the sinking oil prices, this has resulted in a decline of the S&P Global BMI Energy Index by more than 25% YTD.

In contrast, supported by the falling cost in the renewable energy sector and increased investor interest towards sustainability, we have seen a rise in the number and scope of green projects.  The issuance of green bonds has grown to $41 billion dollars by early December (compared to $37 billion in FY2014), but what is more important, the unlabelled green climate-aligned projects have been growing in many parts of the world, starting from Californian solar farms to railways in China. Climate Bond Initiative calculated the size of climate-aligned bond-financed projects at $532 billion in their report “Bond and Climate change: State of the Market 2015” issued in July.

The impact of COP21 and beyond
COP21 brought a ray of hope to those who have been keen to minimize the carbon-related risks.  Supported by the initiatives of public climate leaders, particularly the President of France, Francois Hollande, 195 nations’ delegations have been able to reach a legally binding and universal agreement targeting to get the climate change constrained within 2 degrees beyond the pre-industrial level and aiming to explore the possibility of 1.5 degrees.  The agreement sets a coordination framework for individual governments, government and supranational agencies and NGOs in road mapping and implementing a transition to low carbon economy. This will require approximately $1 trillion dollars to be invested annually in low-carbon technologies and continued technological innovations, shift of funds from developed countries to developing countries.  Part of the solution is in activating long-term and low cost financial solutions for public and private sector. Low carbon indices are clearly important part of this toolkit, as it helps the industry measure the performance of the low carbon market.

Among other positive news, 27 global investors representing over $11.2 trillion of total AUM issued the Paris Green Bonds Statement. Signatories have committed to support policies that drive the development of long term, sustainable global markets in green bonds as part of climate finance solutions. Furthermore, Climate Bonds Initiative (CBI) and UNEP Financial Inquiry Launch Green Bond Policy Report ‘Scaling Green Bond Markets – Guide for the Public Sector’, offer detailed action plans and best-practice examples from around the world for how to grow green bond markets.

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

The Rieger Report: Apple Inc.: Stock & Bonds Move on Different Tracks

Contributor Image
J.R. Rieger

Head of Fixed Income Indices

S&P Dow Jones Indices

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We all know stocks and bonds are rarely correlated.  The recent steep decline in the price of Apple Inc. stock illustrates this vividly.  Since the end of November the price of Apple Inc. stock has fallen by over 10%.  Apple has also become one of the larger U.S. corporate bond issuers.  Those bonds have barely moved during this time period.

As of December 18th 2015:

  • Apple Inc bonds in the S&P 500 Bond Index represent over $36.9billion in market value.
  • These bonds represented just under 1% of the bonds in the index (as measured by market value).
  • There are 18 different Apple Inc. bond issues in the S&P 500 Bond Index.
  • The weighted average bond price of Apple bonds in the index was 94.4 verses 94.7 at the end of November.
  • The  weighted average yield to worst (YTW) of Apple bonds in the index was 2.5% verses 2.48% at the end of November.

The investment grade U.S. corporate bond market tracked in the S&P 500 Investment Grade Corporate Bond Index has had a modest negative return of 0.29% month-to-date so Apple bonds appear to be moving in line with the rest of the bond market.

The S&P 500 Bond Index tracks the fixed rate debt of the blue chip issuers in the iconic S&P 500 Index.

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