CLOSER LOOK DOMESTIC FIXED INCOME

Transcription

1 CLOSER LOOK DOMESTIC FIXED INCOME DATA AS OF AUGUST 2016 Presented to: Presented by: Presented on: Pennsylvania Association of Public Employee Retirement Systems Ryan Labs Asset Management (Daniel J. Lucey, CFA, Sean McShea, Pawel Krasowski) PAPERS Webcast, September 21, 2016 at 10:30 AM EST

2 TABLE OF CONTENTS PAGE 1. Current Capital Market Themes 3 2. Credit Cycle Overview Appendix 33 Ryan Labs Asset Management 2

3 CURRENT CAPITAL MARKET THEMES Ryan Labs Asset Management 3

4 ECONOMIC DATA POINTS & POTENTIAL IMPACT $4.5 Trillion New Treasury Issuance Federal Funds Target Rate: 50 bps 30 Year US Home Mortgage Fixed Average: 3.65% US 10 Year 1.54% versus Japanese 10 Year -0.08% Negative Yields (Signal to lower lending standards) Inflation: 1.8% Demographics: In 2020, the 65 to 85 age group will be the largest growing Crisis in Retirement Infrastructure 1. Low Corporate pension funding levels 2. Low Municipal pension funding levels 3. Low DC savings Ryan Labs Asset Management 4

5 FED ASSETS APPROACH $4.5 TRILLION Source: Bloomberg Ryan Labs Asset Management 5

6 INTEREST RATES SIT AT LOWEST IN HISTORY Source: Bloomberg Ryan Labs Asset Management 6

7 MORTGAGE RATES NEAR LOWEST LEVELS IN HISTORY Source: Bloomberg Ryan Labs Asset Management 7

8 INFLATION SHOWING LITTLE SIGNS OF IMMEDIATE THREAT Source: Bloomberg Ryan Labs Asset Management 8

9 JAPAN 10 YEAR YIELD IS NEGATIVE Source: Bloomberg Ryan Labs Asset Management 9

10 US 10 YEAR YIELDS NOT AS LOW AS YOU THINK US 10 Year Yields vs. Japan 10 Year JGB Source: Bloomberg Ryan Labs Asset Management 10

11 AGES 65 AND OLDER HIGHEST GROWING POPULATION SEGMENT Source: Crandall & Pierce Ryan Labs Asset Management 11

12 LABOR FORCE PARTICIPATION REMAINS LOW Source: Bloomberg Ryan Labs Asset Management 12

13 EMPLOYMENT OFF HISTORICAL LEVELS Employment as Percent of Total US Population Source: Bloomberg Ryan Labs Asset Management 13

14 Ryan Labs Asset Management 14

15 ASSET LIABILITY WATCH AUGUST 31, 2016 Source: Ryan Labs Indices Ryan Labs Asset Management 15

16 ASSET LIABILITY WATCH AUGUST 31, 2016 Notes: Assumptions: RL PPA liability curve is the spot curve of the replication of IRS PPA curve (US credit A to AAA). RL Treasury liability curve is the proxy for economic liabilities. Normal costs = annual contributions No benefit enhancements Source: Ryan Labs Indices Ryan Labs Asset Management 16

17 THE CREDIT CYCLE Ryan Labs Asset Management 17

18 THE CREDIT CYCLE What is it? The credit cycle tracks the expansion and contraction of access to credit over time. Why is it important? Influences the overall business cycle because access to credit affects a company s ability to invest Overtime, performance of credit-oriented fixed income sectors are directly linked Sequence of events typically rhyme, not necessarily repeat Ryan Labs Asset Management 18

19 THE FOUR PHASES OF THE CREDIT CYCLE Falling Leverage Repair Recovery Lower Growth Higher Growth Downturn Expansion Rising Leverage Ryan Labs Asset Management 19

20 THE FOUR PHASES OF THE CREDIT CYCLE Repair Stage Recovery Stage Expansion Stage Downturn Stage After economic downturn Profit margins improved Strengthening economy Slowing corporate growth Companies repay debt Focus on cost cutting & cash generation Corporate bond spreads typically decline Economic growth improves Restricted balance sheets Reduced debt Free cash flows grows Corporate bond spreads continue to decline Economy continues to improve Confidence improves Banks increase lending Corporations increase borrowing Corporate bonds face higher volatility Credit Cycle peaks Increased borrowing Lower earnings Banks reduce lending & tighten lending requirements Corporate bond spreads widen & prices fall Economic slowdown or recession Ryan Labs Asset Management 20

21 CREDIT CYCLE: DELEVERAGING, THEN LEVERAGING High Default Rates begin to fall Defaults Start to Increase Companies in Survival Mode Focus on Liquidity/Consolidation Deleveraging Occurs Leverage Increases Peak in Credit Quality (Leverage Nadir) Animal Spirits Re-emerge Companies Focus on Expansion History never repeats itself, but it does rhyme. Mark Twain Ryan Labs Asset Management 21

22 EVIDENCE OF A LATE-CYCLE CREDIT ENVIRONMENT Flattening Treasury Curve High and Rising Leverage Tightening Credit Conditions Peaking Margins Fall in M&A Activity Modest Slowdown in Employment Possible Federal Reserve Rate Hike Ryan Labs Asset Management 22

23 RL TREASURY YIELDS (12/31/2011 to 8/31/2016) 8/31/2016 Yield (%) 2 Year TSY Year TSY Year TSY Year TSY Year TSY Source: RL Indices Ryan Labs Asset Management 23

24 RISING HIGH YIELD DEFAULT RATE Note: Long term default high yield rate based on number of issues Source: J.P. Morgan Ryan Labs Asset Management 24

25 HIGH AND RISING LEVERAGE Notes: Assumes US bond issuer default rates for 2001, 2009, and current. Assumes US speculative grade default rate for 19 Source: Morgan Stanley Research, Bloomberg, Capital IQ, Moody s, NBER Ryan Labs Asset Management 25

26 LOWER CORPORATE MARGINS Notes: Assumes US bond issuer default rates for 2001, 2009, and current. Assumes US speculative grade default rate for 19 Source: Yardeni Research, Standard & Poor s, Thomson Reuters Ryan Labs Asset Management 26

27 FALL IN M&A ACTIVITY $ Billions Count $600 7,000 $500 $400 $300 $200 3,436 3,405 3,023 5,432 5,535 5,212 4,953 4,722 4,601 4,427 4,424 4,584 4,435 4,476 4,565 4,946 4,049 4,379 4,334 4,142 5,778 5,449 5,717 5,547 5,176 3,906 6,000 5,000 4,000 3,000 2,000 $100 1,000 $0 $156 $219 $264 $233 $182 $401 $267 $251 $194 $306 $240 $365 $200 $348 $289 $384 $327 $367 $439 $525 $571 $454 $484 $507 $540 $461 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q Deal Value ($B) Deal Count Source: Pitchbook Data Ryan Labs Asset Management 27

28 HISTORICAL CREDIT SPREADS Source: Bloomberg Ryan Labs Asset Management 28

29 IMPLICATIONS OF A FED RATE HIKE Overnight Rate (Federal Funds Rate) Increases Discount Window Lending Rate Increases Prime Rate Increases Interest Rate at which depository institutions trade federal funds with each other overnight Central Interest Rate in the U.S. financial market Short term funding for financial institutions in three forms: (1) Primary Credit (2) Secondary Credit (3) Seasonal Credit Credit rate that banks extended to their most credit-worth clients - Primary index for most credit cards, home equity loans, and lines of credit Typically 300 basis points (3%) over the Federal Funds Rate Short Duration Curve Rises Long Duration Curve Flattens Heightened Volatility Source: Crandall, Pierce & Company, Bureau of Labor Statistics, Bureau of Economic Analysis Ryan Labs Asset Management 29

30 OVERNIGHT RATE (FEDERAL FUNDS RATE) 12/31/2010 TO 7/31/2016 Source: Federal Reserve Bank of St. Louis Ryan Labs Asset Management 30

31 CONCLUSION Low Growth Scenario Demographics Drive GDP Higher Overnight Rates does not mean higher Longer Term Yields Low Liquidity Environment High / Rising Leverage + Peaking Margins = Late Cycle Environment Current Market Environment lends itself to Active Management Ryan Labs Asset Management 31

32 PERFORMANCE AND INFORMATION RATIO QUARTILE RANKING ENDING 6/30/2016 QUARTILE RANKING INFORMATION RATIO Ryan Labs, Inc. Core Fixed Income QUARTILE RANKING RATE OF RETURN Ryan Labs, Inc. Core Fixed Income Source: Informa Investment Solutions ( Note: Performance presented above is gross of fees. There are 197 Firms and 401 Products in this universe. Ryan Labs Asset Management receives the PSN 6 star, Top Gun rating for our Core Strategy. 6 star is the top rating. While there is no payment required to be considered for, be awarded, or use the Top Gun award, Ryan Labs Asset Management purchases certain data services from Informa Investment Solutions, Inc. Ryan Labs Asset Management 32

33 APPENDIX Ryan Labs Asset Management 33

34 BOND MARKET WATCH AUGUST 31, 2016 Source: Ryan Labs Indices Ryan Labs Asset Management 34

35 BOND MARKET WATCH AUGUST 31, 2016 Assumptions: 1. Nominals represent conventional U.S. Treasury Bonds and Notes. 2. BEI = Breakeven Inflation Rate (Nominal yields minus TIPS yields). Widening BEI indicates that TIPS are outperforming nominal bonds. When realized inflation is greater than implied inflation, TIPS also outperform. 3. Current Inflation = Bureau of Labor Statistics, Year over Year Consumer Price Index (non-seasonally adjusted, all items, 1 month lag) Source: Ryan Labs Indices Ryan Labs Asset Management 35

36 0 Ryan Labs Asset Management 36

37 INTEREST RATES Source: Crandall, Pierce & Company Ryan Labs Asset Management 37

38 TOTAL RETURN FIXED INCOME Source: Crandall, Pierce & Company Ryan Labs Asset Management 38

39 TOTAL RETURN - EQUITIES Source: Crandall, Pierce & Company Ryan Labs Asset Management 39

40 TOTAL RETURN - ALTERNATIVES Source: Crandall, Pierce & Company Ryan Labs Asset Management 40

41 VALUATION & INFLATION Source: Crandall, Pierce & Company Ryan Labs Asset Management 41

42 EMPLOYMENT, ECONOMY, & TRADE Source: Crandall, Pierce & Company Ryan Labs Asset Management 42

43 RL CASH YIELDS (12/31/2010 to 8/31/2016) 8/31/2016 Yield (%) 1 Month TSY Month TSY Month TSY Month TSY Source: RL Indices Ryan Labs Asset Management 43

44 RL TIPS YIELDS (12/31/2010 to 8/31/2016) 8/31/2016 Yield (%) 2 Year TIPS Years TIPS Year TIPS Year TIPS Source: RL Indices Ryan Labs Asset Management 44

45 DO DEMOGRAPHICS DRIVE THE EQUITY MARKETS? Source: Bank Credit Analyst Ryan Labs Asset Management 45

46 JAPAN S POPULATION BUST WAS LARGELY FORESEEN Source: Bank Credit Analyst Ryan Labs Asset Management 46

47 SPENDING TENDS TO DECLINE IN OLD AGE Source: Bloomberg Ryan Labs Asset Management 47