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Payden & Rygel: Weekly Market Update
Weekly Market Update

Week ending November 25, 2015

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. 17,833 17,737 17,823 17,815
S&P 500 2,089 2,084 2,059 2,067
Nasdaq 100 5,121 5,075 4,736 4,758
The Russell 2000 1,194 1,172 1,205 1,186
DJ STOXX Europe 381 379 343 346
Nikkei Index 19,848 19,649 17,451 17,408
MSCI EM Index 425 419 436 446
Fed Funds Target 0-0.25% 0-0.25% 0-0.25% 0-0.25%
2-Year US Treasury Yield 0.93% 0.88% 0.67% 0.52%
10-Year US Treasury Yield 2.23% 2.27% 2.17% 2.26%
US$ / Euro 1.06 1.06 1.21 1.25
US$ / British Pound 1.51 1.52 1.56 1.57
Yen / US$ 122.71 123.50 119.78 117.93
Gold ($/oz) $1,071.82 $1,068.77 $1,184.86 $1,196.37
Oil $40.68 $40.75 $53.27 $74.14
*Levels as of 9:00 a.m. PDT

Year to Date (12/31/14 -11/25/15)

Dow Jones Industrial Avg 0.06%  
S&P 500 1.48%  
NASDAQ 8.13%  
Russell 2000 -0.90%  
MSCI World Index -0.83%  
DJ STOXX Europe 600 (euro) 11.18%  
MSCI EM Index -2.63%  
Year to Date (12/31/14 -11/24/15)
90 Day T-Bill 0.04%  
2-Year Treasury 0.51%  
10-Year Treasury 0.96%  
ML High Yield Index -2.35%  
JP Morgan EMBI Global Diversified 2.86%  
JP Morgan Global Hedged 1.36%  


Date Report Survey Actual Prior Details
11/24 (US) GDP Annualized QoQ 2.10% 2.10% 1.50% Q3 GDP in the US was revised up; the consumer continued to be the biggest contributor to growth.
11/25 (US) Durable Goods Orders 1.70% 3.00% -1.20% After shrinking for the last two months, US durable goods orders showed a strong increase last month.


Though talked about a lot in the media, holiday spending won't make or break the economy--and it shouldn't flavor your macro forecast. On average since 1992, retail sales between January to October (the 'non-holiday' season) make up 82% of annual sales. The November and December period accounts for the other 18%. Buy gifts, just don't buy the hype. Moreover, regardless of how the Holiday spending stacks up in 2015, the US consumer looks better than at any time since the 1990s. We learned this week that consumer spending exceeded 3% at an annual rate for 5 of the last 6 quarters. With lower energy prices, faster wage growth and more workers employed, consumer spending should continue to power the economy well beyond Turkey day.

Treasury Bonds

The Treasury market traded jittery albeit with a bullish tone as geopolitical stress remains at the forefront, and the large month-end extension looms ahead of trading desks starting to empty for the holiday shortened week. Trading activity was subdued though the market spiked higher following some weaker data, a corporate issuer pulling a large credit deal, and news that Turkey shot down a Russian jet pushing 10-year yields to the low from 3 weeks ago. The curve traded with a flattening bias as the probability of a December rate hike implied by the futures market remained around the 75% area and inflation data came in lower than consensus, leading to a bid in the long end of the curve.

The Treasury auctioned supply across 2-year, 5-year and 7-year notes with the 5-year failing to build in any outright concession for the 5y auction which in turn came almost a full basis point behind the 10am PST level. Auction participation was solid despite the tail and the issue never traded below the stop.

Large-Cap Equities

The U.S. Equity Market posted a modest gain for this holiday-shortened week. With the exception of increasing geo-political tension in Europe and the Middle East, this week has been relatively quiet amid the low attendance and light corporate headlines.

The S&P 500 and Dow Jones Industrial Average indices both closed the week up approximately +0.2%, while the tech-focused NASDAQ Composite rose +0.3%. The higher beta small-cap stocks outperformed large-cap stocks. In terms of style, large-cap value stocks performed in-line with large-cap growth stocks. Cyclical sectors were in favor this week as consumer discretionary and consumer staples were the best performers, while the defensively viewed telecom services and utilities were the laggards.

Corporate Bonds

The primary market was slightly below target with $2.6 billion in issuance versus an expected $5-10 billion. This came entirely on Monday from four different issuers. One deal that was entirely dropped was Vodafone's 30-year bond, which was not completed because of very weak demand.

The secondary market was flat over the week, unchanged as trading slowed ahead of the Thanksgiving holiday. After so much volatility over the last few months, these two weeks have been a unique pause in market activity as levels have moved in a small three basis point range. The Corporate Index Option-Adjusted Spread (OAS) finished the week at +155, flat on the week. Overall, Metals/Mining were 18 wider as commodities continue to deteriorate; energy was nine wider. Senior financials were three tighter and sub financials were tighter by one. Industrials were one wider and utilities were flat.

Mortgage-Backed Securities

Agency mortgages kept pace with Treasuries as yields hovered in a micro range ahead of the Thanksgiving Holiday. Economic reports were mixed and bond market friendly. The market still expects a Federal Reserve hike in December unless next week's employment report disappoints.

Pass-through mortgage spreads were plus/minus their Treasury curves depending on the coupon. Lower coupons trailed by a basis point but cuspy and higher coupons outperformed by two basis points. Ginnie Mae versus conventional price spreads softened due to lackluster demand. For the week, the 30-year current coupon spread versus the 10-year Treasury spread held stated at 71 basis points. According to Freddie Mac, the primary 30-year mortgage rate stalled inside of 4.0% at 3.97% for the past three reporting periods.

Asset-Backed Securities

There were no new deals this week for obvious reasons. Year to date, the ABS market has produced $161 billion, and will likely fall short of the $183 billion mark for 2014. The 2016 outlook from Wells Fargo is $177 billion. The CLO market has produced $90 billion in new issue and will likely fall short of the 2014 pace of $124 billion. The 2016 outlook is cautious with many analysts citing the challenges of the 5% risk retention on CLO manager balance sheets. Most are looking for about $75 billion in 2016 CLO supply.

With the new issue window effectively closed for the year, secondary trading will determine spread direction for the remainder of the year. Liquidity is already drying up, and it gets worse further down the credit stack. If possible, one should wait until 2016 for any significant trade programs. Ally and Ford have elected to wait until 2016 rather than force deals into an unwelcome new issue market at the end of 2015.

Municipal Bonds

The municipal market traded to mostly unchanged yields this week with a flattening bias against a backdrop of uncertain world events. At mid-week, the 10-year AAA benchmark municipal yield registered in at 2.04% and nearly 91% of its Treasury counterpart. The municipal to Treasury yield is even more attractive farther out the yield curve on a relative value basis as 30-year municipal yields are 100% of their Treasury counterpart.

New issue supply shrunk this week to $1.5 billion in a holiday shortened week, much smaller than last week. The 2015 weekly average is about $8.0 billion. The largest deal this week included $136 million Minnesota Housing Finance Agency. New issue supply is higher than last year due to increased refunding volume. Most new issues priced at historically traditional spreads due to the attractiveness of municipals relative to treasuries offset by inconsistent mutual fund flows. The largest deals next week include $400 million Kansas Department of Transportation and $312 million Regents of the University of Michigan.

Competitive deals saw so-so demand while most negotiated new issues were priced attractively in order to garner buyer's attention amidst a low interest rate environment. The secondary market experienced non-eventful bidding with most trading in-line with the overall markets' unchanged tone. Dealer's bids are supportive under current market conditions as the market experienced modest bid wanted activity. The 30-day visible supply is $5.0 billion, somewhat lower to averages for the year. Longer term, municipal bonds should outperform other fixed markets as relationships are attractive relative to Treasuries and the market enters one of the strongest seasonal periods of the year experiencing out-sized calls and redemptions.

High-Yield Bonds

It was a quiet week for the high yield market in this holiday-shortened week in the U.S. There was no new issuance. The month of November 2015 has been challenging for the high yield market after a strong October. The Merrill Lynch high yield BB/B index is down -2.1% month-to-date and much of the weakness has been due to the renewed weakness in commodity prices, ranging from crude oil to copper.

The high yield energy, metals & mining and steel sectors are all down over 4% for the month. Renewed worries about the economic weakness in China have only exacerbated the commodity concerns, which are in many ways tied to China. Some of the weakness was also due to profit taking after a strong October, wherein high yield indices were up in the 3.0% context. The months of December and January have historically been solid performance months for the high yield market, so most investors are hoping for a strong finish and beginning to next year.

Global Bonds and Currencies

Global bond markets were relatively quiet this week ahead of the Thanksgiving holiday period in the US, which traditionally results in reduced market activity. In a week that was light on economic data, market sentiment was largely driven by the geopolitical tension that ensued after Turkey downed a Russian warplane taking part in air strikes over Syria on Tuesday. The general risk aversion sentiment supported "safe-haven" developed market government bonds and yields fell across the board: the benchmark 10-year yield of the German Bund finished 3 basis points lower on Wednesday, while European peripheral spreads to German Bunds tightened. In the UK, Gilts were additionally supported by Bank of England's Governor Carney's comments indicating that interest rates are likely to remain low for longer: the yield on the 10-year note fell by 5 basis points by Wednesday.

In currency markets, the US Dollar was stronger against most major currencies supported by growing expectations that the Federal Reserve will raise interest rates in December. However, these moves were relatively modest and the Japanese Yen, which is traditionally perceived as a "safe-haven" currency, managed to rise against the greenback on the back of the recent geopolitical tension between Russian and Turkey. The euro was softer ahead of the European Central Bank's meeting next week as investors expect further accommodative policy. Sterling initially fell to a two-week low on Tuesday following dovish comments by Bank of England's officials but quickly recouped the losses on Wednesday after Chancellor George Osborne outlined higher UK GDP growth expectations in his Autumn Statement.

Emerging-Market Bonds

Emerging market dollar-pay spreads narrowed 5 basis points (bps) on the week to 381 bps over US Treasuries; local debt yields declined by 2 basis points to 6.85%. EM currencies were mixed against the dollar. The Malaysian ringgit (+4.1%) and the South Korean won (+2.5%) led gains. The Russian ruble (-1.4%) and the Hungarian forint (-1.3%) were the weakest performers.

In Argentina, opposition candidate Mauricio Macri won second round presidential elections. He will assume office on December 10th. These elections mark the end of the President Cristina Fernandez de Kirchner's tumultuous tenure. She and her husband had alternated power since 2003 and had favored an interventionist style of governance. This ultimately led to the country's default on external debt (due to a legal dispute) and significant macroeconomic imbalances. Macri, the former mayor of Buenos Aires, appealed to voters by espousing a message of change. He is known for his effective management of the city of Buenos Aires over the last 8 years.

In Israel, the central bank left the monetary policy rate unchanged at 0.1%. In its statement, the central bank noted that monetary policy will remain accommodative for a considerable time. Similarly, Turkey's central bank remained on hold, leaving its policy rate (one week repo rate) at 7.5%. Despite above-target inflation (7.6% year-over-year in October), Turkey has been on hold since February. In a surprise move, Nigeria cut its policy rate by 200 bps to 11% and lowered banks' cash reserve requirements. The monetary policy committee cited weakening economic activity, higher unemployment, and an uncertain global backdrop.

In Peru, third quarter growth printed 2.9% y/y, in line with consensus expectations. On the supply side, the mining and hydrocarbon sector exhibited solid performance expanding at an 8.7% y/y pace. In South Africa, third quarter GDP was lackluster, growing by a modest 1.0% y/y; consensus was looking for economic activity to increase 1.3% y/y. The agricultural sector was particularly weak (-16% y/y), while manufacturing activity exhibited signs of stabilization (+1.4% y/y) following a contraction in the second quarter.

Fitch downgraded Mongolia from B+ to B on November 24, but left the sovereign on Stable outlook. In its decision, Fitch noted that constraints to the credit outlook include strained external liquidity, fiscal challenges, and a weaker medium-term growth outlook. In contrast, Moody's changed Argentina's sovereign outlook to 'positive' following the victory of Mauricio Macri. Moody's noted that a Macri administration is more likely to implement "credit positive policies" including a resolution with holdout creditors. Moody's rates Argentina's long term foreign debt Ca.

Date Report Consensus Last
11/26 (JN) Natl CPI YoY 0.20% 0.00%
  (JN) Natl CPI Ex Fresh Food YoY -0.10% -0.10%
11/27 (UK) GDP QoQ 0.50% 0.50%
  (UK) GDP YoY 2.30% 2.30%
  (CA) Industrial Product Price MoM -0.10% -0.30%
11/29 (JN) Industrial Production YoY -- -0.80%
11/30 (IT) CPI EU Harmonized MoM -- 0.50%
12/1 (EC) Unemployment Rate -- 10.80%
  (CA) Quarterly GDP Annualized 2.10% -0.50%
  (CA) RBC Canadian Manufacturing PMI -- 48
  (US) ISM Manufacturing 50.5 50.1
  (US) Wards Total Vehicle Sales 18.00m 18.12m
12/2 (EC) PPI YoY -- -3.10%
  (US) ADP Employment Change 188K 182K
12/3 (EC) Retail Sales YoY -- 2.90%
  (EC) ECB Main Refinancing Rate -- 0.05%
  (EC) ECB Deposit Facility Rate -- -0.20%
  (US) Markit US Composite PMI -- 56.1
  (US) ISM Non-Manf. Composite 58.1 59.1
  (US) Durable Goods Orders -- 3.00%
  (JN) Real Cash Earnings YoY -- 0.50%
12/4 (JN) Consumer Confidence Index -- 41.5
  (US) Change in Nonfarm Payrolls 200k 271k
  (CA) Unemployment Rate 7.00% 7.00%
  (US) Unemployment Rate 5.00% 5.00%
  (US) Average Hourly Earnings YoY 2.30% 2.50%
  (US) Labor Force Participation Rate -- 62.40%
  (RU) CPI YoY 15.00% 15.60%

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