Fixed Income Review & Outlook Presented by: Matt Toms, CFA, - - PowerPoint PPT Presentation
Fixed Income Review & Outlook Presented by: Matt Toms, CFA, Chief Investment Officer Fixed Income January 9, 2020 CID-1050582 For financial professional or qualified institutional investor use only. Not for inspection by, distribution or
For financial professional or qualified institutional investor use only. Not for inspection by, distribution or quotation to, the general public.
Presented by: Matt Toms, CFA, Chief Investment Officer – Fixed Income January 9, 2020
CID-1050582
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Q4 2019: Fixed Income Market Review
0.0 1.0 2.0 3.0 4.0 0.25 2 5 10 30
US Treasury Yield Curve
12/31/2019 9/30/2019 12/31/2018
0.0 1.0 2.0 3.0 4.0 5.0 6.0 EM Local Sov EM $ Sov Global xUS Tsy HY Corp CMBS Agency MBS IG Corp Treasuries US Agg
Fixed Income Sector Total Returns: Q4 2019
Total Excess
Q4 2019 Highlights
concerns (trade, negative yields and recession risks), then pulled back after US data alleviated recession concerns. The US Aggregate was up +0.18% for the quarter and is up 8.72% YTD.
a Phase 1 trade agreement between the US and China. Securitized sectors outperformed treasuries, but lagged corporate sectors underscoring their muted sensitivity to global factors.
central banks and receding concerns about US-China trade talks.
appears to be bottoming and the Fed is on the sidelines for the foreseeable future.
As of 12/31/19 MRQ PrevQE 1Y Low 1Y High 5Y Low 5Y High Yields US 10 Yr 1.92 1.67 1.50 2.72 1.45 3.14 GER 10 Yr
0.18
0.80 JPN 10 Yr
0.01
0.47 EM Local Sov 5.22 5.21 5.13 6.25 5.13 7.13 Spreads IG Corp 93 115 93 128 86 197 Agency MBS 39 46 32 49 13 49 CMBS 72 70 64 79 56 132 HY Corp 336 373 336 433 316 734 EM $ Sov 290 337 290 378 264 463
Past performance is no guarantee of future results. Source: Bloomberg, Bloomberg/Barclays, JP Morgan and Voya. MRQ = Most Recent Quarter End. PrevQE = Previous Quarter End. See appendix for additional index disclosures
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Treasury Yields Consolidate in Q4
Source: Bloomberg Barclays and Voya 10-Year as represented by the Bloomberg Barclays 10-year Bellwether Index Data through December 31, 2019
0.0 0.5 1.0 1.5 2.0 2.5 3.0 Jan-19 Feb-19 Mar-19 Apr-19 May-19 Jun-19 Jul-19 Aug-19 Sep-19 Oct-19 Nov-19 Dec-19
Yield (Percent)
10-Year US Treasury Yield Q1 Q2 Q3
and for much of the period, ending lower as the Fed pivoted to a more dovish stance
further in response to escalating trade tensions
when Fed comments suggested a rate cut was
cuts fueled the rally
fears and the risk of negative rates
after US data offsets growth woes
Q4
economic data alleviated fears of a recession
US/China trade talks swayed yields during Q4
Powell announces Fed
future
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2019 Key Concerns: Looking Back and Looking Ahead
Source: Voya Investment Management December 31, 2019
Voya View 2019 What we thought then Voya View 2020 What we think now
Slowdown yes… Recession no Risk of US recession a post-US election risk
BBBs require monitoring Market too pessimistic Rise in BBBs, a conscious corporate decision
Negative rates in the US was certain We don’t need them We don’t want them Market acknowledging the downside of negative rates
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1H 2020 Strategic Investment Themes
Source: Voya Investment Management As of December 31, 2019
Political Uncertainty
Slower global growth has exacerbated ongoing tensions arising from the increasingly unequal distributions of income and wealth, fueled in part by global trade and central bank policies. The resulting rise in populism across the political spectrum creates uncertainty that will stifle near-term confidence and business investment.
Central Banks
Fear of limited conventional monetary capacity will extend the current accommodative stance in pursuit of elusive inflation goals. Increasing concerns about the attendant costs from prolonged negative policy rates will lead central banks to favor other forms of unconventional policy.
The growing belief in the ready willingness to employ additional fiscal capacity, in response to any slowing in growth, fortifies confidence and provide downside protection. Fiscal expansion will modestly support global growth.
Consumer resilience globally will continue to insulate the services sector from lingering manufacturing weakness and provides a floor to growth. While the lagged benefits of global monetary policy easing supports growth, the upside will be uneven and constrained by ongoing political and business uncertainty.
While price inflation remains tame, diminishing spare capacity (of appropriately skilled labor) and populist forces, will support wage growth. Limited ability to pass through higher costs poses a threat to corporate profit margins.
Improving global dynamics will prove supportive to spread product. Given relatively limited upside from current asset valuations, disparate outcomes in growth favor idiosyncratic opportunities over broad market risk taking.
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0.0
1.0
US China Japan UK Germany
While the Path is Known, the Form is Not 2020 Deficit as a % of GDP vs YoY Change
Uncertainty Begets Uncertainty
5 10 15 20 25 1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 2013 2016 Percent Unequal Distribution of Global Income: Bottom 50% vs Top 1% 28% 31% 32% 41% 43% 49%
Macron (FR) Johnson (UK) Merkel (DE) Trudeau (CN) Trump (US) Abe (JP)
Has Led to Voter Dissatisfaction Worldwide Voter Approval of Country Heads
Source: 2019 World Income Inequality Report, Bloomberg, OECD and Voya Investment Management Voter approval from https://www.bloomberg.com/opinion/articles/2019-08-23/at-the-g7-trump-s-approval-rating-is-second-to-one, Business confidence as of November 30, 2019 Lower right: Deficit % of GDP for 2019 and 2020 based on consensus estimates from Bloomberg as of 12/30/2019 and are subject to change.
5 15 25 D-15 A-16 A-16 D-16 A-17 A-17 D-17 A-18 A-18 D-18 A-19 A-19 Creating Headwinds to Business Confidence OECD Business Manufacturing Confidence
US Germany UK Japan China
+0.6
Deficit % of GDP Change from 2019 Top 1% Bottom 50%
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Fed Monetary Policy: Enough to Cushion a ‘Run of the Mill’ Recession
2 4 6 8 95 98 01 04 07 10 13 16 19
Fed Funds Rate: 1995-2019
Source: Federal Reserve and Voya Investment Management As of December 31, 2019
Summary of Fed Rate Cut Cycles Start Date Start Rate End Date End Rate # Cuts Total Decline 7/95 6.00 1/96 5.25 2 75 bps 9/98 5.50 5/99 4.75 3 75 bps 1/01 6.50 6/03 1.00 12 550 bps 9/07 5.25 12/08 0.25 8 500 bps 7/19 2.50 ? ? 3 75 bps
Percent
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Cumulative Bank Returns June 30, 2014 – December 31, 2019 US Banks European Banks
In US dollars
In Euros
The Unintended Consequences of Negative Interest Rates
10 11 12 13 14 15 07 08 09 10 11 12 13 14 15 16 17 18
Euro Area Gross Saving Rate It was supposed to spur consumption It was supposed to support the banks
Source: Eurostat, JP Morgan and Voya Investment Management Euro Area Gross Saving Rate as of September 30, 2019, Lending Rate, Eonia (Euro Overnight Index Average) and Deposit Rates as of October 31, 2019. For cumulative bank returns, US Banks as represented by the total return for the SPDR S&P Bank ETF [Ticker KBE] and European Banks as represented by the total return for the iShares STOXX Europe 600 Banks UCITS ETF (DE) [Ticker SX7PEX GY]
ECB begins negative rates
0.0 1.0 2.0 3.0 4.0 5.0 6.0 03 05 07 09 11 13 15 17 19
Inability to Pass Negative Rates to Depositors Crimps Margins
Eonia Lending Rate Deposit Rate
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Q4:07 Q3:19 Q3:19 Avg 3.8% 7.0% +3.2% 10.9% 9.1% 2.9% 2.0%
7.1% 7.9% 5.8% 4.1%
8.3% 9.5% 5.6% 6.1% +0.5% 4.7% 3.6% 4.4% 1.8%
1.1% 2.2% 62.0% 43.8%
1.0% 3.3%
Total
84.5% 64.8%
3.0% 4.3%
Consumer Credit: Where Debt Grows, So Grow Delinquencies
Source: Federal Reserve and Voya Investment Management As of September 30, 2019 Avg as represented by the average of quarterly observations for the period Q1 2003 – Q3 2019.
Debt / Nominal GDP: 2007 – 2019
0% 25% 50% 75% 100% 07 08 09 10 11 12 13 14 15 16 17 18 19 Student Loans Other Card Auto HE Revolving Mortgage
90+ Days Delinquent
Changes by Component: 12/2007 vs. 9/2019 & Serious Delinquency Rates
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When Beta Isn’t Cheap…Security Selection Will Matter More
200 400 600 800 1000 1200 MBS CMBS Corp EM $ Sov EM $ Corp Corp EM $ Sov EM $ Corp
Current Valuations At Lower End OAS Range: 2010 - 2019
Source: BloombergBarclays, JP Morgan and Voya Investment Management OAS Range as represented by historical option adjusted spread. See appendix for additional index disclosures
Investment grade High Yield Max Min Current
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Security Selection: Corporate & EM Credit
50 100 150 50 100 150 200 250 15 16 17 18 19
IG Spreads vs BBB-A Spread
Source: BloombergBarclays, JP Morgan and Voya Investment Management IG Spreads as represented by BloombergBarclays Corporate Bond Index. BBB – A OAS as represented by the difference between the Bloomberg Barclays Baa Corporate Bond Index and the A Corporate Bond Index. HY Bonds as represented by BloombergBarclays US High Yield Index, Ba-Rated High Yield Index, B-Rated High Yield .Index and Caa-Rated High Yield Index. Right hand charts: EM $ Sov as represented by the JP Morgan EMBI Global Diversified BBB-Rated Index and B-Rated Index. Corps represented by BloombergBarclays Baa-Rated Corporate Bond Index and BloombergBarclays US High Yield 2% Issuer Cap B-Rated Component. As of December 31, 2019
Inv Grade OAS BBB – A OAS
Average Dollar Price Option Adjusted Spread % of Bonds +/-100 bps
All HY 101.4 329 26% BB-Rated 104.9 178 66% B-Rated 102.9 313 34% CCC-Rated 88.7 857 14%
100 200 300 400 10 11 12 13 14 15 16 17 18 19
BBB EM $ Sov vs BBB Corps
200 400 600 800 1,000 10 11 12 13 14 15 16 17 18 19
B EM $ Sov vs B HY Corps
EM $ Sov Corps EM $ Sov Corps Spread between EM and Corp Spread between EM and Corp
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Securitized Credit: Insulated From Global Downside and Upside
45 50 55 60 800 1000 1200 1400 Jan-17 Apr-17 Jul-17 Oct-17 Jan-18 Apr-18 Jul-18 Oct-18 Jan-19 Apr-19 Jul-19 Oct-19 PMI Levels Price Index (rebased to 1000)
Home/CRE Price Indices vs PMIs
Home Prices CRE Global PMI US PMI 50 100 150 200 250 2 4 6 DM / spread (bps) WAL (years)
Spread of AAA or Most Senior Tranche Real Estate Durable Amidst Global Worries Security Level Opportunities Remain
Source: Markit, S&P CoreLogic and Voya Investment Management Home Prices as represented by S&P CoreLogic Case Shiller 20-City House Price Index. CRE as represented by RCA Commercial Property Price Index. Home Price and CRE indices shown as growth of 1,000 beginning January
Home prices as of October 31, 2019. CRE as of November 30, 2019, PMIs as of December 31, 2019 See Appendix for additional disclosure on spreads.
SFR Jumbo 2.0 RPL Legacy Jumbo Non-QM Investor HECM GSE CRT Resi Transition Loans Legacy Subprime MI CRT NPL Legacy Alt-A
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Key Takeaways
Source: Voya Investment Management December 31, 2019
Markets retreat from recession worries, but episodic volatility still in play
With conventional monetary policy tapped out, unconventional monetary policy and fiscal policy hold greater influence
Alpha over Beta: Security selection more valuable in 2020
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Q&A
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Appendix
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Fixed Income Market Review: Sources and Indices
Slide 2: Index Definitions US Treasury Curve Source: Bloomberg US Agg as represented by Bloomberg/Barclays U.S. Aggregate Bond Index Treasuries as represented by Bloomberg/Barclays U.S. Treasury Index IG Corp as represented by Bloomberg/Barclays Corporate Bond Index Agency MBS as represented by Bloomberg/Barclays Securitized – U.S. MBS Index CMBS as represented by Bloomberg/Barclays Securitized – CMBS Index HY Corp as represented by Bloomberg/Barclays U.S. Corporate High Yield: 2% Issuer Cap Index Global xUS Tsy as represented by Bloomberg/Barclays Global Treasury Ex-US index, unhedged EM $ Sov as represented by JP Morgan EMBI Global Diversified Index EM Local Sov as represented by JP Morgan GBI-EM Global Diversified Index US 10 Yr as represented by Barclays 10-year US Treasury Benchmark Bond GER 10 Yr as represented by Barclays 10-year Germany Benchmark Bond JPN 10 Yr as represented by Barclays 10-year Japan Benchmark Bond Slide 9: Index Definitions Investment Grade MBS as represented by Bloomberg/Barclays Securitized – U.S. MBS Index CMBS as represented by Bloomberg/Barclays Securitized – CMBS Non-Agency Index Corp as represented by Bloomberg/Barclays Corporate Bond Index EM $ Sov as represented by JP Morgan EMBI Global Diversified Index, IG Bucket EM $ Corp as represented by JP Morgan CEMBI Index, IG Bucket High Yield HY Corp as represented by Bloomberg/Barclays U.S. Corporate High Yield: 2% Issuer Cap Index EM $ Sov as represented by JP Morgan EMBI Global Diversified Index, HY Bucket EM $ Corp as represented by JP Morgan CEMBI Index, HY Bucket
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Fixed Income Spread: Sources
Slide 11: Spread level security references Collateral Type Security Reference Tranche Investor VERUS 2019-INV3 A1 Jumbo 2.0 FSMT 2019-2 A2 HECM NHLT 2019-2A A NPL VOLT 2019-NP10 A1A Non-QM GCAT 2019-NQM3 A1 Resi Transition Loans LHOME 2019-RTL3 A1 MI CRT TMIR 2019-1 M1 GSE CRT STACR 2019-HQA4 M1 RPL TPMT 2019-4 A1 SFR CAFL 2019-3 A Legacy Subprime SABR 2004-D01 M1 Legacy Alt-A RAST 2006-A1 1A8 Legacy Jumbo SYT 2004-12 A1
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Explanatory Notes
The information contained in this document has been prepared solely for informational purposes and is not an offer or invitation to buy or sell any security or to participate in any trading activity. This document is intended only for professional investors and describes a strategy only. Some material shown is compiled from third party sources thought to be reliable, but accuracy and completeness cannot be guaranteed. Any opinions expressed herein reflect our judgment at this date and are subject to change without notice. Neither Voya Investment Management nor any other company or unit belonging to Voya Financial, nor any of its officers, directors, or employees accept any liability or responsibility in respect to the information or any recommendations expressed herein. No liability is accepted for any losses sustained by readers as a result of using this publication or basing decisions on it. The value of your investments may rise or fall. Past performance is not indicative of future
in the payment of interest and/or principal on its loans), interest rate risk (the risk that the yield on an investment will rise and fall in response to changes in market rates of interest), and market risk (the risk that the value of an investment will rise or fall in response to general economic conditions and events). The account information presented in this report is based on the records and information provided by Voya Investment Management. The results may be preliminary and unreconciled and are subject to change. Voya Investment Management does not guarantee the accuracy of the information contained in this portfolio accounting
and confirmations for trade and holdings information.
Footnotes
Portfolio Characteristics The portfolio specific characteristics (such as Average Duration, Average Yield, etc.) are based on the total portfolio market value including cash and derivatives, as provided by our valuation provider (BNY Mellon) and security characteristics provided by BlackRock Solutions which utilizes a different pricing hierarchy (Barclays). BNY Mellon prices combined with Barclays analytics will result in different portfolio averages than are reported. Portfolio and Benchmark averages (Duration, Yield to Maturity, Convexity and Average Life) are reported directly from BlackRock Solutions using Blackrock models and assumptions. As such, the Benchmark Analytics provided above may be different from Barclays. Top ten credit exposures include cash. Ratings The portfolio’s average quality rating is calculated as a market value-weighted average of the rating assigned to all positions, including derivative securities, but excluding non-rated securities held within the portfolio measured and reported as of the date of this report. The "Effective Rating" is determined as follows: Voya IM seeks individual security ratings from three credit rating agencies that are registered with the SEC as nationally recognized statistical rating organizations -- typically Moody's, S&P and Fitch. If ratings are available from all three agencies, the security will be assigned the median rating. If ratings are available from only two of the agencies, the lower of the ratings will be used. If a rating is available from only one agency, then that rating will be used. If ratings are not available from any of the three agencies, then we may either assign the security an internal rating or mark it as "N/R" (not rated). AAA is the highest (best) Effective Rating, and D is the lowest (worst) Effective Rating. When an Effective Rating is reported for a group of securities (such as for an asset class or the overall portfolio), it is calculated as a market value-weighted average of the Effective Rating assigned to each component security (excluding securities without an Effective Rating). Please note that Voya does not endorse or affirm the Effective Ratings or any agency ratings.
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Explanatory Notes
Furthermore, credit rating agencies disclaim all warranties and liability for their ratings, which (a) should be viewed as their opinions and not as statements of fact or recommendations as to suitability or to purchase, hold, or sell a security and (b) are not guaranteed as being accurate, timely or available. For derivative securities, swap contracts are rated on the basis of the underlying security, however, futures contracts are treated as a combination of Treasury securities and cash positions, they have no net impact to the average quality rating in the portfolio. Measures pertaining to average credit quality may change over time and illustrations presented in the client report are for informational purposes only. Individual client investment guidelines may have different rules and the foregoing presentation is not meant to represent a compliance certification of the portfolio’s overall credit quality. This report may contain information obtained from third parties, including ratings from credit ratings agencies. Reproduction and distribution of third party content in any form is prohibited except with the prior written permission of the related third party. Third party content providers do not guarantee the accuracy, completeness, timeliness or availability of any information, including ratings, and are not responsible for any errors or omissions (negligent or otherwise), regardless of the cause, or for the result obtained from the use of such content. THIRD PARTY CONTENT PROVIDERS GIVE NO EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE. THIRD PARTY CONTENT PROVIDERS SHALL NOT BE LIABLE FOR ANY DIRECT, INDIRECT, INCIDENTAL, EXEMPLARY, COMPENSATORY, PUNITIVE, SPECIAL OR CONSEQUENTIAL DAMAGES, COSTS, EXPENSES, LEGAL FREES, OR LOSSES (INCLUDING LOST INCOME OR PROFITS AND OPPORTUNITY COSTS OR LOSSES CAUSED BY NEGLIGENCE) IN CONNECTION WITH ANY USE OF THEIR CONTENT, INCLUDING RATINGS. Credit agency ratings are statement of opinions and are not statements of fact or recommendations to purchase, hold or sell securities. They do not address the suitability of securities or the suitability of securities for investment purposes, and should not be relied on as investment advice. Bond Sector Comparisons Sector weights are based on total portfolio market value, which includes security market values (including accrued income), plus cash, cash equivalents and derivatives (variation margin for Futures, and Market Value of Swaps). With the exception of the Treasury, ABS, and CMBS Sectors, the following sector groupings apply: ■ Treasury and Cash includes Cash/Cash equivalents which includes trade receivables/payables (which may be net positive or negative), TBA liabilities, accrued income on securities that have been sold pending settlement (accrued income is otherwise reflected in the other sectors), and in Sector Weights, also includes variation margin for futures (which may be positive or negative). ■ Government Related sector is comprised of Agency, Local Government, Sovereign and Supranational securities. ■ Corporate sector is comprised of Financial Institutions, Industrial and Utility securities. ■ Agency Mortgages sector contains Fannie Mae (FNMA), Freddie Mac (FHLMC), and Government National Mortgage Association (GNMA). ■ Securitized sector is comprised of ABS, CMBS, and Agency and Non-Agency Mortgage Backed Securities. ■ Other sector is comprised of Convertibles, Common and Preferred Stocks and Municipal Bonds. ■ "Derivatives“ (if applicable) includes forwards, options and swaps (see Appendix – Portfolio Holdings Derivatives for details) and futures.
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Disclosure
This information is proprietary and cannot be reproduced or distributed. Certain information may be received from sources Voya Investment Management (Voya IM) considers reliable; Voya IM does not represent that such information is accurate or complete. Certain statements contained herein may constitute "projections," "forecasts" and other "forward-looking statements" that do not reflect actual results and are based primarily upon applying retroactively a hypothetical set of assumptions to certain historical financial data. Actual results, performance or events may differ materially from those in such statements. Any opinions, projections, forecasts and forward-looking statements presented herein are valid only as of the date of this document and are subject to change. Nothing contained herein should be construed as (i) an offer to buy any security or (ii) a recommendation as to the advisability of investing in, purchasing or selling any security. Voya IM assumes no obligation to update any forward-looking information. Past performance is no guarantee of future results.