Investment Commentary December 6, 2013
Global Fixed Income Weekly Executive Summary •
This month’s Purchasing Manager’s Index (PMI) reports point to improving global growth, with the global manufacturing index rising from 52.1 to 53.2. This positive trend in PMIs supports our view that growth-sensitive assets should continue to perform well.
•
We have increased our underweight position in agency mortgage-backed securities (MBS). Valuations remain expensive and the market is under pressure from the prospect of reduced Federal Reserve purchases, a shrinking investor base and renewed prepayment risk.
•
Strong US data, including November’s payrolls report, reinforce our expectation that the Fed will begin to wind down its asset purchases by the end of the first quarter 2014. We have increased our short position in US rates. Chart of the Week: Retracement in agency MBS spreads
• The chart shows agency MBS passthrough spreads over the London interbank offered rate (LIBOR).
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• Agency MBS spreads have widened since late October. The main drivers are strong US data and mounting expectations for a reduction in Fed asset purchases (or “taper”).
30 20
• We are short agency MBS on the basis that the Fed will soon announce a taper, and we see increased refinancing risk affecting higher-coupon securities.
10 Fannie Mae 30-year Libor Option-adjusted Spread 0 Sep-13
Oct-13
Nov-13
Dec-13
Source: Barclays. As of December 3, 2013.
Market Commentary and Strategy Duration: We are short in the US and the UK. We are neutral in the Eurozone and Japan. •
Better US economic data have driven an increase in front-end Treasury yields following their strong rally since September. November’s payrolls showed a 203K increase in jobs, and a substantial drop in the unemployment rate, from 7.3% to 7%.
•
Strong global PMIs suggest a synchronized economic upswing may be underway.
Country: In our G10 strategy, our main long positions are in Europe and Canada and we are short the US and Japan. We initiated a long in Greece. •
We believe Greek debt valuations are attractive given the likelihood that Greece’s progress on structural reforms will warrant continued support from the Troika (the European Commission, the European Central Bank [ECB], and the International Monetary Fund).
•
European peripheral spreads were little changed on the week, and France outperformed with 10-year yields tightening 5bps. We expect more secondary market supply in the coming weeks as banks tidy their balance sheets ahead of the ECB’s asset quality review (AQR).
Past performance does not guarantee future results, which may vary. The economic and market forecasts presented herein have been generated by GSAM for informational purposes as of the date of this presentation. There can be no assurance that the forecasts will be achieved. Please see additional disclosures at the end of this presentation. 1
Investment Commentary December 6, 2013
Currency: We are long the US dollar versus both developed market and emerging market (EM) currencies. •
Global growth is likely to improve in the coming months, driven by better US data. This, coupled with a benign global inflation picture, should be positive for risk assets. However, the prospect of Fed tapering keeps us positioned long the US dollar versus EM currencies as well as the yen and Swiss franc.
•
Commodity currencies continue to weaken, and countries with higher external financing risks have taken the brunt. We are short the Brazilian real, Russian ruble and Canadian dollar.
Sector Strategies Agency MBS: We modestly increased our short agency passthroughs versus long multi-families. •
Agency mortgage spreads widened over the week as selling across the investor community overwhelmed Fed demand.
•
Several factors are weighing on agency MBS. Higher-coupon securities may face increased refinancing risks from progressive policies favored by the prospective new chairman of the Federal Housing Finance Agency (FHFA). Expectations of Fed tapering are causing weakness in lower coupons. We see a shortage of buyers to step in as the Fed withdraws, since banks and realestate investment trusts (REITs) have become net sellers in an effort to de-risk and comply with regulatory requirements.
Source: Barclays as of Dec. 5, 2013. Option adjusted spread (OAS).
Non-Agency MBS/ABS: We are overweight in non-agency MBS. •
Non-agency MBS prices were little changed on the week.
•
The CoreLogic Home Price Index was up 0.2% month-overmonth in October, and roughly 12.5% year-to-date. We expect the October Case-Shiller reading to show similarly positive results.
•
Both home price indexes mentioned above suggest a high likelihood that total home price appreciation (HPA) for 2013 will be 13% or greater. Source: GSAM as of Dec. 5, 2013.
Investment Grade Corporates: We are neutral. •
Investment-grade (IG) credit spreads were modestly tighter on the week, with the US slightly outperforming Europe according to the major indexes.
•
We believe IG credit is close to fair value at current levels, and further rallies are less likely as the Fed unwinds its quantitative easing (QE) program.
•
US new issuance in December is expected to be $25-$35bn versus $42bn a year earlier. Year-to-date issuance now stands at $824bn versus $802bn at the same point last year.
Source: Barclays as of Dec. 5, 2013.
Source: GSAM, Barclays. Past performance does not guarantee future results, which may vary.
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Investment Commentary December 6, 2013
High Yield & Bank Loans: We are moderately overweight. •
High yield returned 0.15% over the week, outperforming bank loans, which returned 0.09%.
•
High yield funds reported inflows totaling $433mn for the week. Bank loan funds received $800mn.
•
High yield bond issuance was $2.8bn over the past week. Yearto-date new issuance now stands at around $374bn, a second consecutive annual record. Loan issuance is around $619bn.
•
Defaults continue to trend lower, according to JP Morgan, at less than 1% for high yield and 1.8% for loans.
Source: Barclays as of Dec. 5, 2013.
Emerging Markets: We are long in emerging market debt. •
The Brazilian Central Bank (BCB) hiked the policy rate by 50bps to 10% last week. The accompanying statement implied a possible slowdown in the pace of hikes.
•
Markets have priced more risk into the Brazilian curve, suggesting some concerns about the policy outlook and its effectiveness.
•
We are less pessimistic about the direction of policy. We believe the country’s current liabilities and debt trajectory are manageable. We hold long positions in two-year swaps and longend inflation-linked bonds, coupled with a short in the Brazilian real.
Source: Barclays as of Dec. 5, 2013.
Source: GSAM, Barclays. Past performance does not guarantee future results, which may vary.
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Investment Commentary December 6, 2013
Sovereign Yield Monitor
Other Europe
Euro Bloc
Current Yield to Maturity (%)
10 Year Yield Spreads to Germany (bps) 1 Week
2 Weeks
1 Month
12 Weeks
28-Dec-12
Change
Change
Change
Change
Change
31
-5
-5
-5
-9
-13
8
57
-9
-9
-16
-27
-17
2.44%
28
58
11
11
10
3
-10
0.82%
1.86%
17
-
-
-
-
-
-
N/A
N/A
8.90%
11
704
-6
14
76
-126
-355
Ireland
0.96%
2.15%
3.55%
3
169
-14
-12
-17
-33
N/A
Italy
1.31%
2.81%
4.22%
17
236
0
0
-11
-17
-83
Netherlands
0.17%
1.11%
2.16%
14
30
-3
-3
-4
-7
12
Portugal
3.32%
4.94%
5.98%
11
412
-5
-16
-3
-111
-158
Spain
1.56%
2.82%
4.24%
9
238
-8
1
-3
-9
-157
Norway
1.51%
N/A
2.92%
12
-
-
-
-
-
-
Sweden
0.95%
1.71%
2.39%
16
-
-
-
-
-
-
Switzerland
-0.12%
0.16%
0.99%
8
-
-
-
-
-
-
UK
0.50%
1.65%
2.92%
18
-
-
-
-
-
-
1 Week
2 Year
5 Year
10 Year
Austria
0.22%
1.04%
2.17%
12
Belgium
0.23%
1.09%
2.43%
France
0.27%
1.12%
Germany
0.21%
Greece
Current Yield to Maturity (%)
Rest of the world
Yield Change (bps) Change
14-Nov-13
Yield Change (bps)
10 Year Yield Spreads to US (bps) 1 Week
2 Weeks
1 Month
12 Weeks
28-Dec-12
Change
Change
Change
Change
Change
152
1
-3
-4
39
-10
14
-20
0
-3
-9
-7
-26
4.77%
-1
189
-15
-6
-13
4
6
1.49%
2.87%
13
-
-
-
-
-
-
0.20%
0.63%
3
-
-
-
-
-
-
2 Year
5 Year
10 Year
1 Week
14-Nov-13
Australia
2.75%
3.61%
4.40%
14
Canada
1.09%
1.81%
2.68%
New Zealand
3.17%
4.29%
United States
0.30%
Japan
0.09%
Source: Bloomberg as of Dec. 5, 2013.
Sovereign 10-Year Yield Levels 20 18 16
France (LHS) Italy (LHS) Spain (LHS) US (LHS) Greece (RHS)
Germany (LHS) Portugal (LHS) United Kingdom (LHS) Japan (LHS)
35
30
25
14 12
20
% 10
% 15
8 6
10
4 5
2 0 Sep-12 Oct-12 Nov-12 Dec-12 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13
0 Jul-13
Aug-13 Sep-13 Oct-13 Nov-13 Dec-13
Source: Bloomberg as of Dec. 5, 2013.
Source: GSAM, Barclays. Past performance does not guarantee future results, which may vary.
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Investment Commentary December 6, 2013
Global Economic Snapshot
Source: Bloomberg as of Dec. 5, 2013.
Source: GSAM, Barclays. Past performance does not guarantee future results, which may vary.
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Investment Commentary December 6, 2013
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