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).
40
• 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