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Payden & Rygel: Weekly Market Update
Weekly Market Update

Week ending May 20, 2016

A weekly newsletter providing a synopsis of the latest market and economic news and releases and a recap of the securities markets. Find commentary for a wide range of sectors: US equities, US Treasury, corporate, mortgage, municipal and high-yield bonds, global bonds and currencies, and emerging-market bonds.

  Friday* Last Week Dec. 31
1 Yr Ago
Dow Jones Ind. Avg. 17,541 17,535 17,425 18,286
S&P 500 2,054 2,047 2,044 2,131
Nasdaq 100 4,769 4,718 5,007 5,091
The Russell 2000 1,106 1,102 1,136 1,257
DJ STOXX Europe 338 335 366 408
Nikkei Index 16,736 16,412 19,034 20,203
MSCI EM Index 406 408 411 478
Fed Funds Target 0.25-0.50% 0.25-0.50% 0.25-0.50% 0-0.25%
2-Year US Treasury Yield 0.89% 0.75% 1.05% 0.58%
10-Year US Treasury Yield 1.86% 1.70% 2.27% 2.19%
US$ / Euro 1.12 1.13 1.09 1.11
US$ / British Pound 1.45 1.44 1.47 1.57
Yen / US$ 110.48 108.63 120.22 121.04
Gold ($/oz) $1,252.54 $1,237.07 $1,061.42 $1,206.34
Oil $48.14 $46.21 $37.04 $59.97
*Levels as of 7:51 a.m. PDT

Year to Date (12/31/15 -5/20/16)

Dow Jones Industrial Avg 1.85%  
S&P 500 1.37%  
NASDAQ -4.20%  
Russell 2000 -2.05%  
MSCI World Index -2.12%  
DJ STOXX Europe 600 (euro) -5.68%  
MSCI EM Index -1.27%  
Year to Date (12/31/15 -5/19/16)
90 Day T-Bill 0.10%  
2-Year Treasury 0.64%  
10-Year Treasury 4.28%  
ML High Yield Index 6.75%  
JP Morgan EMBI Global Diversified 6.29%  
JP Morgan Global Hedged 4.00%  


Date Report Survey Actual Prior Details
5/17 (UK) CPI Core YoY 1.40% 1.20% 1.50% UK core inflation was driven down by lower airfares due to an early Easter holiday.
  (US) CPI YoY 1.10% 1.10% 0.90% US headline inflation had its highest monthly increase since February 2013.


The odds of a summer rate hike surged this week, at least in the eyes of the market. The probability, as measured by fed funds futures pricing, of a June rate hike jumped from 4% to 30%, while July went from less than 20% to a coin flip. Traders responded to a flurry of Fed speakers delivering a similar message: rate hikes in 2016 were still on the table. The April FOMC meeting minutes released mid-week also revealed policymakers' view that "it likely would be appropriate for the Committee to increase the target range for the federal funds rate in June," if the data warranted such a move. To wrap up the week, NY Fed President Bill Dudley stated the case plainly: "I think we've been pretty clear in recent weeks that further tightening is likely this year, through a wide range of Fed speakers." Are you listening?

Treasury Bonds

The Federal Reserve has spoken and clearly has the Treasury market's attention. The market had the first rate hike not priced in (implied by the futures market) until the second half of 2017 but the minutes reminded all of us that they truly want to hike in the next few meetings even if that doesn't mean June.

The probabilities of a hike needed to be closer to 50% for the next few meetings if they could have any hope of moving the needle higher and they got just that. Treasury yields moved quite a bit on Tuesday and Wednesday this week with the market testing important support levels before buying emerged from domestic and foreign asset managers. The curve came under strong flattening pressures and finished the week at the flattest levels since mid-March. Despite the market taking a bit of a breather to end the week, dealers reported continued buying in the long end of the curve. The re-pricing of the front-end left TIPS struggling both outright and on breakevens though the $11 billion 10-year TIPS reopening auction was well received.

Large-Cap Equities

The U.S. Equity Market posted a weekly gain for the first time in four weeks as investors responded positively to the hawkish FOMC minutes. Despite disappointing corporate earnings results from retailers, broad equities managed to end the week higher as trading activity was robust on back of increased intra-day volatility. The S&P 500 closed the week up approximately +0.6%, while the tech-focused NASDAQ Composite climbed +1.4%. Large-cap value stocks outperformed large-cap growth stocks. In terms of style, the higher beta small-cap stocks outperformed large-cap stocks. The best performing sectors were financials and info tech, while the worst performing sectors were utilities and telecom.

In fund flow news, domestic equity mutual funds continued to face redemptions as Lipper reported investors redeemed $2.4 billion for the week, the fifteenth consecutive week of redemptions. However, international equity mutual funds fared better after Lipper reported investors bought $153 million for the week.

Corporate Bonds

Issuance continued strong through the third week of May. We are on track to meet or possibly exceed expectations of $45-$50 billion with $47 billion issued by Friday morning. Total issuance for the month hit $100 billion on the 17th. To give some context, the largest month of issuance so far in 2016 was January with $115 billion. The biggest deal of the week was issued by Dell. The computer company issued $20 billion low-BBB rated bonds across the curve. They elected to issue only fixed bonds after testing the waters for floaters. The deal was more than four times subscribed and got a significant price bump in secondary trading. The front end did particularly well, tightening as much as 40 basis points by the next morning.

In corporate news, Pfizer opted to buy Anacor Pharmaceuticals for over $5 billion after its recent deal with Allergan fell through. The Corporate Index Option-Adjusted Spread (OAS) finished the week at +152, flat on the week despite the flood of supply. Overall metals/mining were eight tighter; energy was seven tighter. Senior financials were unchanged and subordinated were one wider. Industrials were one tighter and utilities were tighter by four.

Mortgage-Backed Securities

The U.S. Treasury market sold off due to the market pricing in an increased likelihood of a Fed rate increase. While U.S. Treasuries increased by 15 basis points across the curve, the agency mortgage market looked on with a "sigh of relief" as agency mortgages outperformed their treasury/swaps hedges across most coupons and programs.

The reason for the outperformance stems primarily from the compensation investors were receiving in the form of narrow spreads to treasuries when prepayment risk, the primary risk for mortgage securities, was at very high levels. Mortgage loans created over the past year to 18 months with rates in the 4% vicinity were nearly approaching their first opportunity to refinance in mass. If mortgage rates could edge just a little lower, prepayment speeds could spike precipitously and performance would suffer. The back up in rates put this risk on hold...at least for the moment. Within the sector, GNMA's outperformed their FN/FH counterparts and the mid coupons, with the highest refi risk, performed the best.

Asset-Backed Securities

Demand was greater than supply in ABS space, and despite the heavy new issuance, virtually all classes priced at the tight end or even through initial price guidance. This in turn is making the secondary market extremely competitive with spreads well though the new issue market. Next week's calendar is also heavy with issuers trying to get in front of Memorial Day. It is only Friday, and deals are already well subscribed.

The top end of the CLO stack (AAA thru A) is unchanged, but BBB and below are wider as there has been trace weakness in both IG corporates and high yield. Marketplace lending has finally caught a few days of no news, which is probably the best medicine for the ailing sector.

Municipal Bonds

The municipal bond market saw a modest rise in yields this week. The 10-year benchmark AAA yield level is 1.60% and relatively rich at 86% compared to its treasury counterpart. Hawkish Federal Reserve minutes put markets on notice for a rate hike sooner than anticipated that sent bond yields higher, although municipals bonds outperformed.

Well over $11 billion of new issuance will hit the market this week, one of the biggest calendars of the year. One of the largest deals of the week is $2.5 billion New York Transportation Development Corporation for LaGuardia Airport (Baa3/NR/BBB). Despite its large size, the deal was received phenomenally well as yield starved investors search for yield in lower rated deals. Some maturities were re-priced as much as 25 basis points lower in yield than original price terms.

Even in the midst of heavy new issue supply, the market continues to show its resilience. Municipal bonds funds have seen elevated fund flows so far this year and this week was no exception. Meanwhile, the news from Puerto Rico continues to deteriorate as the islands Highway and Transportation Authority declared a state of emergency. In addition, legislation was introduced that establishes a financial control board to manage debt restructuring and finances in Puerto Rico and includes other reforms, which still needs to be passed by Congress as major bond payments loom July first.

High-Yield Bonds

The BofA Merrill Lynch BB/B cash pay constrained index was down -0.35% this week as spreads inched wider by one basis point for an option-adjusted-spread of +487 basis points. The BofA Merrill Lynch BB/B index that excludes utilities and energy was down -0.36% for an OAS of +462 as the spread of that index also edged wider by one basis point. The BofA Merrill Lynch Euro BB/B constrained index was up +0.09% as the spread of that index tightened by four basis points for an OAS of +408.

High-yield was mostly unchanged for the first two days of the week and up until late morning on Wednesday, when the market was surprised by the unexpectedly hawkish comments contained in the release of the FOMC minutes. Risk markets sold off on the news, but recovered much of the losses by the end of trading. Thursday's trading session saw some weakness as equities moved lower, but Friday saw ETF's in the market with offer-wanted-in-competitions lists and the bias was towards better buying.

The rates markets bore the brunt of the disappointment as fears of rising rates depressed UST's. High-yield in general went out slight lower with the lower coupon and longer duration bonds underperforming. $5.6 billion across eight tranches priced this week in high-yield. A good portion of recent new issuance has been 10-year maturities and the rates weakness may dampen further enthusiasm from investors for longer maturities.

Fund flows for high-yield totaled a positive $1.14 billion week-to-date after last week saw $1.9 billion exit the asset class. YTD inflows for high-yield mutual funds total $10.2 billion versus a positive $8.1 billion at time in 2015. Leveraged loans had an outflow of $139 million this week after getting an inflow of $303 million last week which was the largest inflow in 56 weeks. Outflows in leveraged loan funds total $6.1 billion as compared to an outflow of $5.1 billion at this time in 2015.

Global Bonds and Currencies

Global bond markets came under pressure during the past week on improving risk appetite, as gains in stocks and commodities reduced demand for the safety of government bonds. The minutes of the Federal Reserve's April policy meeting released late in Wednesday's session showed that although several policymakers thought there were still risks to the economic outlook, a number believed it would be "appropriate" to lift benchmark interest rates on June 15 if economic data and labor market conditions keep strengthening and inflation approaches the 2 per cent target. 10-year US Treasury yields were up by about 10 basis points on the week.

In Europe, the sovereign bond markets followed a similar trend and 10-year German Bund yields rose by 3 basis points, despite data showing that Eurozone inflation decreased in April. Peripheral European bond spreads over German Bunds were somewhat tighter on the week.

Over in the UK, the 10-year Gilt yield finished the week 6 basis points higher, despite continued nervousness over the UK referendum on the EU. Sentiment improved following the announcement of data showing faster UK wage growth.

In the currency markets, the US dollar appreciated versus most major crosses, as the prospect of US interest rates heading higher sooner rather than later boosted the dollar. The euro finished the week lower versus the US dollar in reaction to lower inflation data, while sterling was stronger on better employment data. The Japanese yen ended lower on the week, despite better than expected GDP numbers. The Australian dollar lost ground against the US dollar after a report showed employers added fewer jobs in April.

Emerging-Market Bonds

Emerging market (EM) dollar-pay spreads widened six basis points (bps) to 399 bps over US Treasuries, while local debt yields widened by 13 bps to 6.59%. EM currencies were generally weaker against the dollar, with the Indonesian rupiah (-2%) and South African rand (-1.8%) exhibiting the most depreciation over the period. The Argentine peso (+1.1%) outperformed.

In the Dominican Republic, incumbent President Danilo Medina was reelected for another term in office by a large majority (over 60% of the vote). Medina, who had been widely expected to win elections, has pledged to move forward with additional fiscal and power sector reforms.

In Chile, the central bank maintained its reference rate unchanged at 3.5%, in line with expectations. In its statement, the board noted that inflation remained above target while growth, while in line with internal forecasts, was still tepid. In Argentina, the central bank lowered the rate on its 35-day central bank bills (a policy rate proxy) by 75 bps, to 36.75%, on signs that inflation is starting to turn. In South Africa, the central bank (SARB) held its policy rate on hold at 7%, marking a pause after 75 bps of tightening this year. Inflation in South Africa remains above the upper bound of the SARB's target (6%), registering 6.5% y/y in April. Similarly, the central bank of Malaysia kept its reference rate unchanged at 3.25%.

In Chile, Q1-16 GDP expanded by 2% y/y, with the external sector (stronger exports and a decline in imports) contributing positively to growth. Mexico's final estimate of Q1-16 GDP was released, with growth increasing by 2.6% y/y. This was in line with the flash print released in April. In Russia, preliminary first quarter GDP pointed to a 1.2% y/y contraction, a print that was better than the consensus estimates for -2% y/y growth. In Thailand, economic activity also surprised to the upside, expanding by 3.2% y/y. This outturn was supported by a boost in government spending. Last, Philippine Q1-16 came in at 6.9% y/y. Investment, which increased by 25.6% y/y, was the largest contributor to growth.

In ratings news, Moody's lowered Saudi Arabia's sovereign rating to A1 from Aa3; it left the country on 'stable' outlook. In its statement, Moody's highlighted the negative impact of lower oil prices on Saudi Arabia's credit profile.

Date Report Consensus Last
5/23 (US) Markit US Manufacturing PMI 51 50.8
  (EC) Consumer Confidence -9 -9.3
5/24 (GE) Exports QoQ 0.50% -0.60%
  (GE) ZEW Survey Current Situation 49 47.7
  (US) New Home Sales 520k 511k
5/25 (US) Markit US Composite PMI -- 52.4
5/26 (UK) GDP QoQ 0.40% 0.40%
  (UK) GDP YoY 2.10% 2.10%
  (US) Durable Goods Orders 0.30% 0.80%
  (US) Pending Home Sales NSA YoY 0.10% 2.90%
  (JN) Natl CPI YoY -0.40% -0.10%
  (JN) Natl CPI Ex Fresh Food YoY -0.40% -0.30%
5/27 (JN) Natl CPI Ex Fresh Food, Energy YoY 1.00% 1.10%
  (US) GDP Annualized QoQ 0.80% 0.50%
  (US) Personal Consumption 2.00% 1.90%

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