Article

The Markets – October 2016

Cash Review & Outlook

  • After trading in a 15 basis point range all month, 30-day A1/P1 rated U.S. commercial paper closed out September at its 30-day moving average of 0.54%.
  • With the October 14th deadline for money market reform looming we would expect overnight paper to be in strong demand as Prime Funds should continue front-loading liquidity.
  • There is currently a probability of just under 60% that the Fed will raise the overnight rate at their December meeting, almost the same 50/50 probability that was forecast back in January.
  • With that said, as we move into the final quarter of 2016 our strategy will remain consistent – the portfolio will be front-loaded with liquidity largely through the purchase of very short dated commercial paper while additional monthly cash flow will be derived from amortizing A1+/P1/F1+ rated, money market eligible, ABS paper.

Investment Grade Bonds Review & Outlook

  • The investment grade bond market experienced another month of positive performance with the Barclays Intermediate Government/Credit index returning 0.13%.
  • The credit index was relatively steady in August despite emerging volatility late in the month associated with chatter surrounding the European banking system and more specifically the near term liquidity of Deutsche Bank.
  • Credit closed out the month 0.02% wider on a spread basis and contributed -0.28% total return and -0.07% excess return relative to duration matched Treasuries. Year to date total return and excess return remains robust at 8.30% and 2.85%, respectively.
  • The markets are now focused on 3rd quarter earnings season which unofficially kicks off during the second week of October.
  • The structured product market finished the quarter on a strong note, turning in 0.25% of total return for the month of September and outperforming U.S. Treasury hedges by 0.15% according to the Barclays Capital Aggregate Index.
  • Asset Backed and Agency Mortgage Backed Securities led the way, reflecting a bias towards safety. We have continued to invest in short high quality ABS bonds, content to let them roll down the interest rate curve and reinvest proceeds as needed.
  • This flight to quality was also reflected in the commercial real estate sector where the short duration, high quality assets held value while the rest of the sector underperformed during the month.

High Yield Bonds Review & Outlook

  • The BofA Merrill Lynch High Yield Cash Pay Index returned 0.65% in the month of September, bringing the year-to-date return of the Index to 15.2%.
  • Strong rebounds in commodity prices led to outperformance with the top relative performer being Energy.
  • Optimism about a possible agreement by OPEC for curbing oil production fueled the ongoing rally.

Equity Review & Outlook

  • U.S. equities rose for a seventh straight month led by the Nasdaq which returned 1.89% in September. The S&P 500 was up just 0.02% for the month while the Dow lost 0.41%.
  • Equities began the month trading in a tight range, but experienced considerable volatility in the back half the month.
  • Energy, driven by surging oil prices, and Technology stocks outperformed other sectors.
  • Global stock markets finished down for the month with Europe, Japan and China losing -0.57%, -2.00% and -2.55%, respectively.
  • U.S. equity valuations remain high, however, we continue to find attractive valuations within certain sectors.
  • Oil played a more central role this month gaining 6.5%, helping the energy sector gain 3.08%.

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