The A1/P1 commercial paper curve steepened throughout the month of November with 1-week paper ending the month flat at 0.42% while 1-month paper increased 5 basis points to 0.60%.
Moving into the New Year, we expect bills and short agency debt to richen as bill supply diminishes resulting from the 2015 debt ceiling legislation whereby the Treasury is bound to let their cash position decline into mid-March 2017.
Investment Grade Bonds Review & Outlook
The investment grade bond market represented by the Barclays Intermediate Government/Credit index experienced negative returns of -1.73% in November.
Risk assets responded positively to the November election as the credit portion of the Barclays Intermediate Government/Credit index closed at the strongest levels year-to-date. The index tightened 0.02% and provided 0.38% of excess returns bringing year-to-date total to 3.63%.
The election also brought rate volatility which translated into a slower primary market. For the month, supply fell just short of $75 billion relative to the $96 billion printed last year and over $115 billion in 2014.
Market participants are expecting a short December with the holidays and the much anticipated Federal Reserve meeting. Combine that with year-end black out period, we are expecting slow primary markets and poor liquidity but improving technicals with higher rates and low origination.
The Structured Product sector underperformed for the month of November led exclusively by the Agency Mortgage market per the Barclays Aggregate Index.
ABS and CMBS both outperformed duration matched U.S. Treasuries as investors found attractive risk adjusted return profiles and put money to work.
Interest rates appeared firmly in bear territory weighing down a choppy residential mortgage market. Agency Mortgages lagged by 43 basis points for the month.
We continue to avoid residential mortgages and favor short duration high quality Asset Backed and Commercial Real Estate Backed securities.
High Yield Bonds Review & Outlook
The BofA Merrill Lynch High Yield Cash Pay Index returned -0.40% in the month of November.
Hillary Clinton’s loss was expected to increase uncertainty and result in a selloff in credit and equities. Instead, uncertainty decreased and the prospects of less regulation, lower taxes and a boost in infrastructure spending all led to equity index historic highs and a continuation of the climb in interest rates.
The high yield market outperformed investment grade bonds during November due to an improved outlook for credit, shorter benchmark duration and a higher carry.
The 10-Year US Treasury Yield rose in November from 1.83% to 2.38%, 100 basis points above July’s market low point.
The spread for the High Yield Index narrowed from 483 to 449 basis points.
Equity Review & Outlook
U.S. equity markets all gained with the S&P 500 Index rising 3.70%, DOW + 5.88% and Nasdaq + 2.59%.
International market returns for the month were China +4.83%, Japan +5.08% and Europe + 0.05%.
Beneficiaries of President Elect Trump’s proposed economic platform and strategic initiatives were companies in the banking, healthcare, industrial and energy sectors.
Lagging sectors included telecom, utilities, and REITS which are negatively impacted by the effects of higher interest rates.
Growth prospects for the U.S. economy and corporate earnings were both given a boost from positive final third quarter earnings results, better 2017 guidance and Trump’s pro-business stance and his call for infrastructure spending.
Oil prices rose 4.17% during November providing a nice rally in energy shares which also profited from Trump’s pro-drilling rhetoric. OPEC and non-OPEC countries’ just announced production cuts will also further benefit oil prices and related companies.