Market Commentary

U.S. dollar sovereign spreads finished approximately 20 basis points wider for the quarter as trade tensions and crowded positions dominated the direction of spreads for the first three months. Emerging market corporates benefited due to less duration sensitivity and significant outperformance isolated in during January and February, while local currency assets were the star performer at the index level.

The first three months of 2018 were volatile for the high yield market, as an equity selloff, rising interest rates, weaker than expected global growth data, and the possibility of an unexpected trade war with China combined forces to drive the market lower. The market rallies that closed 2017 for both equity and high yield extended into the month of January due to the continued optimism that corporate earnings would increase due to recent passage of tax reform.

The first quarter of 2018 marked the end of what was once a relentless rally in corporate credit. Local emerging and developed markets continued its stellar performance from last year and posted the best total return of all liquid fixed income markets for the first quarter.

The Bloomberg Barclays Long Credit Index widened 9 basis points in the first quarter of 2018 and underperformed similar-duration Treasuries. The Long Credit Index finished 37 basis points higher quarter-over-quarter and the Long Corporate Index closed up 38 basis points with both indices yielding 4.40%. Within the corporate industry groups, Industrials performed best with the Wireline sector driving the outperformance. Non-Corporate credit outperformed as Taxable Municipals benefitted from a lack of supply and Sovereign and Quasi Sovereign names rebounded from a poor fourth quarter.

In more closely examining the front-end index’s performance over the first quarter, the least negative excess returns were posted by the Technology, Energy and Consumer Cyclical sub-sectors. Financials, Capital Goods and the Utility sub-sectors represented laggards. Our sub-sector weightings and exposures in Automotive Finance, Health Care (including selected municipals that fall into this category), Media and Entertainment, and Pharmaceuticals generated positive excess returns across our strategies.