doubleline june 2014 commentary (1)

8/12/2019 Doubleline June 2014 Commentary (1)

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Quarterly Commentary

June 2014

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2/21

Quarterly Commentary 6/30/

Overview

Throughout the first half of the year risk assets

connued to appreciate along with U.S. Treasury

(UST) prices, meanwhile domesc corporaons haveengaged in a series of mergers and acquisions

(M&A) acvity. A connued lowinterest rate

environment, suppressed risk premia overseas, slow

growth in demand, record corporate profitability,

record levels of cash holdings by the corporate sector,

and the interacon of all these factors are likely

contribung factors. Yeartodate (YTD) North

American M&A volume has been almost $1 trillion,

with the second quarter of the year accounng for

$544.8 billion of this total. A connued lowinterest

rate environment, suppressed risk premia elsewhere,

slow growth in consumer and business demand,

record corporate profitability, record levels of cash

holdings by the corporate sector, and the interacon

of all these factors are likely contribung factors. The

proposed purchase of Time Warner by Comcast for

$68.4 billion, and DIRECTV by AT&T for $66.0 billion

during the first quarter represented the two largest

deals of the year then, but the second quarter also

saw massive proposed deals from Valeant and

Medtronic each above the $45 billion mark. Monthly

deal volumes above the $150 billion mark that have

been common in 2014 are reminiscent of the heady

levels of 2007. This sort of bullish senment was also


expressed in the 5.23% total return of the S&P 50

Index during the second quarter, with 2.07% retur

during June alone. Bond returns, as measured by thBarclays U.S. Aggregate Bond Index, were similar

robust in the face of doom and gloom coming into th

year, with a 2.04% return during the quarter. Bein

long risk has been the posion to be in thus far

2014, but economic indicators could be interpreted a

suggesng quite different posioning.

Surely the most surprising economic indicato

received during June was revised data showing Re

U.S. Gross Domesc Product (GDP) contracted at

2.90% annualized rate during the first quarte

Consumpon growth was significantly belo

preliminary esmates, and a decline in investmen

trimmed nearly 2% from growth alone. The headlin

unemployment figure connued to fall finishing th

quarter at 6.1%, but the proporon of worke

considered under employed was unchanged on th

quarter at 6.0% of the labor force. The combined ratof those unemployed or underemployed of 12.1

remains highly elevated relave to levels seen befor

the Great Recession. Add in a labor force parcipao

rate reminiscent of the late 1970s and the labo

market does not look as robust as depicted by th

headline unemployment rate alone. The world


3/21


largest economy added 816,000 jobs in total during

the quarter, however, offering something of a silver

lining. Junes Federal Reserve (Fed) minutes suggest

the Fed Governors are cognizant of many of these

(and other) weaknesses that connue to permeate

the economy so many years aer the official end of

the Great Recession, and the tone regarding future

rate increases remains quite dovish. Low levels of

inflaon corroborate this plan of acon. What

remains to be seen, however, is if the economic data

will eventually substanate the bull market that

connues mostly unabated in 2014.

U.S. economic data released in the second quarter

helped to paint a picture of an economy emerging,

albeit unevenly, from a weak first quarter likely ed

to unusually severe winter weather that affected

consumers across much of the naon. The third

revision for first quarter Gross Domesc Product

(GDP) was reported as shrinking by 2.9%, wellbelow1.8% consensus esmates and the prior revision of

1.0%. Sll, more recent data released in June

illustrated the economy may be recovering: nonfarm

payrolls added 288,000 jobs for the month and the

unemployment rate dipped to 6.1% (thought the

Labor Force Parcipaon Rate remains quite low at

62.8 according to the Bureau of Labor Stascs).

Consensus esmates had been for a gain of only

215,000. Other data points, such as factory orde

shrinking in May and the manufacturing secto

expanding at a slightly slower pace for June, painted

somewhat more mixed picture.

Minutes released from the Federal Open Marke

Commiee (FOMC) meeng on June 1718 showe

that the Fed may be leaning toward ending its bond

buying smulus program in October. Though QE ma

end by early fourth quarter of this year, some Fe

board members remain concerned enough about th

economy to keeping rates low wellinto 2015.

couple" policymakers thought the Fed "may need t

allow the unemployment rate to move below i

longerrun normal level for a me in order to kee

inflaon expectaons anchored and return inflao

to its 2% target, according to the FOMC minute

Chairwoman Janet Yellen herself stated in the Jun

18th

, 2014 press conference that the Fed reaffirme

its view that a highly accommodave stance o

monetary policy remains appropriate.

The eurozone economy remains extremely sluggissupporng the European Central Banks (ECB

addional easing policies over the quarter. Consume

prices grew by just 0.5% for the 12months endin

June, less than half the ECBs 2.0% target. Consume

confidence unexpectedly fell in the month of Jun

while ECB data indicated that lending to companie

and households fell for the 25th

straight month

May. In early July, ECB President Mario Draghi stated

the key ECB interest rates will remain at presenlevels for an extended period. The ECB furthe

released details of its latest TLTRO, whereby bank

will gain access to funding that they can hold for a

long as four years if they maintain or increase the siz

of their loan porolio to firms and households.



4/21


Emerging Markets Fixed Income

Markets broadly rallied in the second quarter of 2014:

mixedtoimproving economic data from developed

naons combined with central banks broad policies

to maintain low interest rates aided with offseng

bouts of geopolical noise from varying emerging

market economies. Risk assets, such as U.S. and

internaonal stocks rallied, along with a number of

commodies such as copper and crude oil. 10year

UST yields fell April through May, before rising in June

and ending the quarter 19 bps ghter at 2.53%. In EM

corporate debt, spreads ghtened by 22 bps, as

investors connued to pour cash into the space in an

apparent search for higher yielding assets.

For the quarter, EM debt as represented by the JP

Morgan Emerging Markets Bond Index Global

Diversified (EMBI) returned 4.76%, the bulk of that

performance came in the month of May. EM

sovereign bonds outperformed both EM corporates

and local bonds in this period.

China, the worlds second largest economy, showed

some improvement in the month of June: the official

Source: JP Morgan

(Past performance is no guarantee of future results.)

manufacturing Purchasing Managers Index (PMI) ros

to 51.0 in June from 50.8 in May, indicang slight

greater expansion across the sector. HSBCs Chin

manufacturing PMI, which is more representave o

smalltomedium firms, was nearly unchanged, whi

the HSBC Services PMI rose to a 15month high o

53.1. The Chinese government connues t

implement targeted smulus packages to help ensur

the naon hits its 7.5% growth target, as th

economy rebalances toward domesc consumpo

For the second quarter, YoY GDP growth just hit th

official 7.5% target. The PBoC this year has started

100 billion yuan quota for relending, aimed a

agriculture and small businesses, while also offerin

300 billion Yuan toward lowincome housing. Crack

have appeared this year in a Chinese economy tha

has seen much of its growth fueled by investment.

solar firm defaulted in March, which was the fir

onshore default in China. Numerous trust produc

and associatedfi

rms are struggling to meepayments, with nine trust product defaults in the fir

five months of 2014, and more disnctly possible

the laer half of the year. Finally local governmen

are under pressure from debt ed to slumpin

property markets, with a local government financin

vehicle in Jinan City defaulng on its loan, the fir

official disclosure of such a default.

The second quarter was characterized by a number o

geopolical crises springing up in emerging market

from the headlinegrabbing Russian buildup of troop

along the Ukrainian border in conjuncon with civ

war in eastern Ukraine; to the May ouster of th

elected Thai government by the naons militar

following widespread protests and gridlock; to th

surprise June aack and rapid gains made b

the Islamic State of Iraq and the Levant (ISIL) acros



5/21


much of western Iraq; to the widening strike

paralyzing much of South Africa. Each of these

situaons remains extremely fluid, though broader

markets have calmed aer inial spikes in volality.

Though Moscow has ordered troops to stand down

from immediate borders, and has engaged somewhat

in dialogue with Kiev, the supply of arms and material

to separast rebels does not appear to have stopped.

The Ukrainian militarys recent dedicated push into

the eastern provinces does appear to be encircling

rebel forces within a few key cies. In Thailand, the

military remains in control of the government, with

much of the country on lockdown and generalelecons not planned unl October 2015.

In June, Iraq witnessed Islamist guerillas overwhelm

weak government forces in a surprise aack from

Syrian territory. Brent crude spiked above $114 as the

fate of the Shiitemajority government stood in

doubt. Government forces did manage to stabilize

front lines by late June, though ISIS connues to

control a large poron of the country and threaten

instability. In South Africa, 220,000 metalworkers

have gone on strike and paralyzed the auto industry.

This acon is occurring only weeks aer planum

workers returned to mines aer a fivemonth strike. A

fourweek strike by the same metal working union

last year cost the sector around $2 billion.

In Latam, the U.S. Supreme Court denied a final

appeal by Argenna against a lower court ruling that

it had to pay holdout creditors in a nearly decadelong legal saga. This situaon remains extremely fluid.

Inially it appeared that President Crisna Fernandez

de Kirchners government would aempt to transfer

current holders of Argennean New Yorklaw debt

into locallaw debt in an effort to circumvent the U.S.

courts ruling, but fairly recent indicaons have

emerged that the government may be nearing a

selement with holdout creditors. Argennas debt

has performed strongly this quarter in ancipaon of

some sort of resoluon to the saga. Many eyes wer

also on neighboring Brazil which is hosng the Wor

Cup this summer. On the economic front, thoug

Brazil connued to undershoot its primary deficit go

of 1.9%, the Real was amongst the top performing EM

currencies in the quarter with a 2.6% gain. Som

investors have looked favorably upon centerle

President Dilma Rousseff fading in polls below 40%

Centerright opposion candidate Aecio Neves

perceived as more marketfriendly connues to bui

popular support heading into October elecons, risin

from the teens in polling early this year to low20

currently.The first half of 2014 saw a number of elecons tak

place worldwide to varying degrees of impact, fro

the surprising outrightmajority in parliament fo

Indian Prime Minister Narendra Modi lending fuel to

rally across Indian assets, to the ghtening of the rac

for Indonesian president cooling off a strong rally

debt and currency in the Southeast Asian naon. Th

bulk of elecons for this cycle have passed, barrin

select cases like Brazil, and now aenon will turn t

the ability of new governments to implement refor

policies promised during their respecve elecons.

The second quarter of 2014 saw investors return t

emerging markets funds in force, with all first quarte

oulows reversed for a yeartodate (YTD) inflow o

$5.3 billion. A total of $18.2 billion entered EM fund

in 2Q14, with $6.1 billion of these inflows occurring

June. Flows into hardcurrency funds outnumberelocalcurrency denominated funds by nearly fourto

one in this past quarter. In June, and during th

second quarter overall, a majority of inflows entere

funds that are benchmarked to corporate an

sovereignblended indices. We believe the new issu

pipeline will remain relavely robust despite th

summerme.



6/21


Investment Grade Credit

Investment grade corporate credit connued to post

healthy returns during the month of June and in the

second quarter. Over the course of the past month

and quarter, investment grade corporate credit

spreads have ghtened as heavy supply has met

healthy demand. A favorable credit environment has

been posively influenced by the FOMCs dovish

forward guidance of the Feds zero interest rate

policy, signs of an improving U.S. economy and

relavely low market volality.

Investment grade credit recorded a second quartertotal return of 2.71% and has gained 5.70% YTD, as

measured by the Barclays U.S. Credit Index. The

Index ended the quarter 7 bps ghter and

outperformed duraonmatched UST by 81 bps. For

the month of June the Barclays U.S. Credit Index

ghtened by 2 bps generang a total return of 0.08%,

and outperformed duraonmatched UST by 26 bps.

This brings the streak of posive returns to six

consecuve months.

For the first six months of the year fixedrate gross

investment grade supply came in at a robust $645.6

billion making it the largest halfyear of issuance on

record. Issuers priced approximately $291.7 billion of

fixedrate gross investment grade supply for the three

months ending June 30, 2014 led by Apples $12

billion in April, the largest transacon by a sing

issuer. Throughout the quarter, there was an increas

in event risk as a number of major M&A transacon

(e.g., DirecTV/AT&T, Covidien/Medtronic, Hillshire

Tyson among others) took place. Fixedrate gro

investment grade supply for June was approximate

$92.2 billion. Industrials led gross supply, issuin

$44.5 billion of investment grade debt.

Within investment grade, investors have connued t

reach down the credit spectrum as BBBs have poste

excess returns of 38 bps for the month, 135 bps fo

the quarter and 263 bps for the first half of the yea

Within investment grade for the month of June, th

bestperforming sectors included Home Construco

(+1.37%); Metals (+0.99%); Oil Field Service

(+0.72%); Airlines (+0.57%) and Natural Gas (+0.54%

The worstperforming sectors were Technology

0.05%); Food & Beverage (0.03%); Industrial/Other

0.02%); Midstream (0.00%); and Refining (0.03%

The bestperforming sectors for the second quarte

included Sovereigns (+2.18%); Cable Satellit

(+1.76%); Metals (+1.76%); Paper (+1.71%) and Hom

Construcon (+1.70%). At the other end of th

spectrum the worstperforming sectors were Gamin



7/21


8/21


High Yield

Through the second quarter, highyield bonds

connued to benefit from a combinaon of

accommodave global central banks, stagnant growth

trends, low market volality and benign UST yields.

The Ci HighYield CashPay Capped Index returned

0.82% during the month of June, 2.29% during the

quarter and 5.31% YTD. The Indexs yieldtoworst

was 4.97% at June monthend, ghtening 8 bps for

the month, 21 bps for the quarter and 63 bps YTD.

The spreadtoworst of 3.75% ghtened 17 bps during

the month, 13 bps during the quarter and 40 bps YTD.

The allme low on spreadtoworst sits around

2.70%, set in June 2007, and the spread between

investmentgrade and highyield bonds stands slightly

above 3%, versus the allme low of roughly 1.75%

(also set in June 2007).

While the U.S. economy faltered in the first quarter,

this was not reflected in highyield companies

earnings. According to Barclays, yearonyear EBITDA

growth for the broad market was 10% for the fir

quarter and has been increasing for the last fou

consecuve quarters. Debt growth has slowed dow

significantly since last year and coverage raos are a

their allme highs, aided significantly by low intere

rates. This divergence stems from increased busine

spending, which has been boosng highyie

companies earnings, relave to weak consume

spending that has been dragging GDP down. Secto

level data reflects this as retail issuers have bee

struggling recently, while companies serving othe

businesses have seen strong earnings growth.

The best performing High Yield sectors during th

month included Retail Food & Drug (+2.17%), Reta

Stores Other (+1.42%) and Metals/Mining (+1.19%

The worst performing sectors were Oil Equipmen

(1.09%), Texle/Apparel/Shoe Manufacturin

(0.00%) and Paper & Forest Products (+0.15%). Fo

the quarter, the best performing sectors wer

Diversified Telecommunicaons (+7.99%), RetaiFood & Drug (+7.31%) and Airlines (+7.14%). N

sectors had negave quartertodate (QTD) return

but the laggards include Gaming (+2.29%), Texle

Apparel/Shoe Manufacturing (+2.55%) and O

Equipment (+2.58%).

Highyield mutual funds had net inflows of $1.0 billio

in June, according to Lipper, taking the net quartert

date and year

to

date infl

ows to $3.0 billion and $6billion, respecvely. Highyield bond newissu

volumes slipped slightly in June to $36 billion from

$43 billion in May, and acvity was predominate

driven by refinancing (72%). Aer pricing a recor

$399 billion of highyield bonds 2013, the aracv

yield environment and increase in M&A acvity le

volumes elevated again in the first half of the year a

$209 billion. With regard to acvity in the secon


1. EBITDA refers to earnings before interest, taxes, depreciaon and amorzaon.

Source: S&P Capital IQ Leveraged Commentary and Data (LCD)


9/21


quarter, highyield bond volume totaled $121.2

billion, narrowly seng a new record. Highyield

bond volume used for acquisions during the second

quarter totaled $27 billion, the most since 2007.Addionally a notable 62% of highyield issuance

during the second quarter was used for refinancing,

versus 57% in the first quarter and 56% in 2013.

No highyield bond issuers defaulted in June as

acvity remains extremely benign. The parweighted

U.S. highyield default rate decreased to 2.06%, down

from an upwardly revised 2.11% in May. Excluding

TXUs default, the parweighted default rate declined

to 0.70%, from 0.75% in May. The issuer weighted

highyield default rate decreased to 1.56% from

1.66%.



10/21


highest returns were concentrated in the lowe

credit rangs. Yeartodate CCC loans returned 7.33%

Bs returned 2.34% and BBs generated a 1.54%. Th

defaulted category had the largest impact on th

Index with a 27.69% return led by strong performanc

in Energy Future Holdings.

Retail loan mutual funds reported an oulow of $2

billion in June, which followed a $2.1 billion oulow

May. The June retail withdrawal was the large

oulow since August 2011, when $5.2 billion wa

redeemed. Second quarter retail fund oulowtotaled $6 billion reducing the yeartodate reta

inflows to $1.7 billion. Furthermore, exchangetrade

funds (ETFs) focused on U.S. bank loans also hav

experienced modest oulows. These ETFs took

about $6.5 billion in 2013 and the first quarter of th

year, but $302 million flowed out in the secon

quarter.

Offseng retail oulows, CLO volume in June set

record with $13.8 billion of new issues eclipsing th

previous record of $13.5 billion set in August 2006

Considering both CLO and retail flows, the loa

market received just over $11 billion of inflows fo

the month. CLO issuance yeartodate is now $60.5

billion from 113 transacons. Net loan marke

inflows yeartodate from CLO and retail acvit

stands at $53 billion. June new issuance increased t

$63 billion from $37 billion in May. Meanwhile, yea

todate loan new issuance was $322 billion dow

from $353 billion issued during the 1st half of 201

mainly due to a sharp drop in refinancing acvit

Total loans outstanding increased 11% from yearen

2013 to $756 billion.

For the most part, investors have been aracted t

such funds because they offered beer yields in la

Bank Loans

During the first half of 2014 the loan market

benefied from record Collateralized Loan

Obligaons (CLOs) new issue volumes,

accommodave global central banks, stagnant growth

trends, and low market volality. The S&P/LSTA

Leveraged Loan Index returned 0.58% for the month

of June. The change in market value contributed

0.20% to the monthly return. The Index returned

2.60% YTD with price movement contribung 0.31%

to total return. The Index yieldtomaturity (YTM)

decreased to 4.65% in June from 4.66% in May and

4.94% at the beginning of the year. The discounted

spread to a 3 year life was LIBOR plus 446 bps.

There were no new defaults in June, the second such

month in a row. As a result, the default rate declined

to 4.41% from 4.60% in May. Excluding Energy Future

Holdings, which represented the largest default in

history at $19.5 billion, the default rate would be at a

21 month low of 1.08%. As in prior periods, the


Source: S&P Capital IQ Leveraged Commentary and Data (LCD)


11/21


years lowrate environment than could be had in

investmentgrade bonds and most investors expected

the floang rates would cushion them as interest

rates rose. While the strong rush of inflowscombined with the return of covenantlite loans into

the space has been worrisome for some we see the

potenal for more buying opportunies in the space.

We sll maintain a relavely conservave posion in

the fund, valuing higher quality credits.



12/21


been raised to between $85 billion and $100 billion.

Except for AAAs, 2.0 CLO debt spreads for the rest o

the capital structure have widened during th

quarter. Spreads up and down the capital structur

are sll nowhere near the ghts of 2013. New issu

AAA spreads sll hover in the 150 DM area. Top e

managers AAA have priced inside of 150 DM whi

less known managers are priced about 10 bps wide

Near the top of the capital stack spreads for 2.0 A

and As have only widen by about 515 bps compare

to the previous quarter and 2013 year end. Farthe

down in the mezzanine tranches, the 2.0 BBB and BB

spreads have widened out by roughly 2550 bps fro

last quarters average spreads. 1.0 CLO spreads fo

AAA connue to ghten by 10 bps as more deals ex

reinvestment period and pay down. 1.0 AA, A an

BBB spreads were relavely unchanged for th

quarter. Since 1.0 BBs sele immediately and have a

aracve carry, spreads have come in by 25 bps.

Collateralized Loan Obligaons (CLOs)

Collateralized Loan Obligaon (CLO) issuance

connued along at a steady and strong pace. June

was the most acve month ever with 25 CLOs priced

with a total of almost $13.8 billion. The previous high

was set in August 2006 with $13.50 billion in new

issuance. With Junes issuance, the total issuance year

to date stands at $60.57 billion across 113 deals. If

issuance connues at Junes pace, the new issue

market for 2014 is expected to be around $100

billion.

Money connued to flow out of retail loan funds inJune for the 11th straight week, reversing the 96

consecuve weeks of inflows. The reversal in retail

fund flows was one of the propellers of the increase

in CLO issuance. As CLOs fill the space le by retail

loan funds, loan spreads started to ghten slightly

from the wides in May. Sll, relavely wider spreads

have improved the arbitrage opportunity and have

made it easier to place the AAA and equity tranches.

New issue spreads for AAA came in slightly in June

from the 150 DM (discount margin) area to mid 140

DM for top er managers. Newer managers are sll

pricing in the 150 DM area. The rest of the CLO debt

tranches spreads were unchanged in June and are sll

wider than the spreads at the year end of 2013.

CLO new issuance connued to pick up steam and set

a record issuance high in the second quarter. The past

three months each had issuance over $11 billion for atotal of $35.25 billion for the quarter. The previous

record was $32.8 billion set during the second quarter

of 2007. Part of the increase in issuance is due to the

size of the deals. The average size for a deal in the

second quarter was $570 million, with a few deals

totaling over $1 billion. In 2013 the average deal size

was $481 million. Due to the increase in issuance and

size of deals, forecasts for 2014 total issuance has



13/21


14/21


will the possibility of a rate hike be considered. Many

Wall Street economists feel that the earliest

possibility of a rate hike will be the second quarter of

2015.

During the quarter, there was lile development on

the reform of the Government Sponsored Enterprises

(GSEs) as it appears to be a situaon where the

centrists of both polical pares are in agreement,

but to garner enough support the current bill will

have to aract votes away from the center. It is likely

that any mutually agreeable soluon will result in

higher mortgage rates than they would be under thecurrent structure of the GSEs. Addionally, any

policies that are agreed upon will most likely be

phased in over a 5year period. In midMay, the

Federal Housing Finance Agency (FHFA) released their

2014 strategic plan for the conservatorship of the

GSEs. To note, the HARP (Home Affordable Refinance

Program) cutoff date will remain the same which

means we should connue to see HARP having less

and less of an impact due to burnout. The FHFA

wants to increase the amount of risk transfer bond

issuance in 2014. It is this risk transfer (or privately

held first loss pieces) that is at the core of GSE reform

in discussions on Capitol Hill. The FHFA reiterated the

plan is to wind down the GSEs to at least $250 billion

by 2018, while currently the porolios are

approximately $450 billion in size.



15/21


modificaons connue to account for the majority o

loan modificaons.

News of mortgage ligaon found its way back int

the headlines during the quarter with news that non

back servicer, Naonstar, is being quesoned abou

the rapid growth of the firm and its handling of i

loan servicing volume. Many Naonstar service

bonds have experienced some disrupon in cashflo

as the servicer seeks to claw back principal an

interest on loans held on its books. Federal regulato

have put the company under scru

ny as its loan boohas grown rapidly while staffing has not grow

proporonally.

NonAgency MortgageBacked Securies

The second quarter of 2014 in the nonAgency

mortgage sector can be characterized by improving

fundamentals coupled with reduced trading volume.

The large liquidaon lists seen in the first quarter all

but disappeared. Instead, bid list volume was largely

driven by hedge funds and money manager selling.

Bid list volume was very consistent over the 3 months

with $11 billion of current face trading each month.

The bulk of the acvity was in AltA and subprime

collateral. Against this back drop of improving

fundamentals and ghter supply technicals, yields

ghtened during the quarter. Prime and AltA bonds

ghtened by approximately 25 bps while subprime

gapped in by 50 bps.

Mortgage rates declined during the quarter with the

30year fixed rate mortgage average rate falling from

4.3% in April and ending June at 4.15%. Despite the

modest decrease in rates, prepays were a bit mixed.

Prepays were up in April and slightly in May, then

declined in June, resulng in largely unchanged

prepay rates during the quarter. Liquidaon rates

behaved in a similar paern with rising liquidaon

rates early in the quarter, and declining liquidaon

rates in June, again resulng in largely unchanged

liquidaons during the quarter. The pace of loan

modificaons connues to slow down; however, rate



16/21


Mirroring that trend, the office delinquency rat

improved by 16 bps to 6.44%, the Retail delinquenc

rate improved by 11 bps to 5.43%, Mulfami

delinquency improved by 43 bps to 9.93%, an

Lodging improved by 32 bps to 5.39%. The Moody

RCA Commercial Property Price Indices (CPP

naonal major markets composite index increase

0.37% in May 2014 while nonmajor markets were u

1.51%. June loan loss severies averaged 45% ove

$932 million of loans liquidated according to Trep

Analycs.

Commercial MortgageBacked Securies

(CMBS)

The CMBS market ended the quarter with spreads

grinding ghter, buoyed by strong demand outpacing

limited new supply. Low market volality has led to

connued spread ghtening across the curve with

investors reaching for yield down the capital stack,

driving demand in mezzanine tranches off of new

issue deals. The June new issuance calendar consisted

of nine deals totaling $6 billion, an approximately

40% increase over both April and May, driven by five

largeloan singleborrower deals. The fourfi

xedrateconduit transacons issued totaled $3 billion,

consistent with April and Mays conduit new supply.

Twentyfour new issue conduit deals have priced YTD,

slightly outpacing 2013s 23 deals through June;

however, pool sizes have shrunk slightly, leading to a

10% decline in total conduit new issuance by balance

yearoveryear. Conduit new issuance remained

consistent throughout the quarter at approximately

$3.6 billion per month, down approximately $1 billionper month from the first quarter.

The CMBS poron of the Barclays U.S. Aggregate

Bond Index returned 0.18% for June and 1.31% for

the second quarter. For the month, legacy AAA

spreads ghtened by 2 bps to 84 bps over swaps. On

the new issuance side, the most recently priced new

issue deal AAAs priced at 78 bps over swaps, a 7 bps

improvement over the last deal priced in May and

BBBs priced at 315 bps, a 20 bps ghtening.

The overall U.S. CMBS delinquency rate fell by 22 bps

to 6.05% in June according to Trepp Analycs, which

makes it the 13th consecuve month of delinquency

improvement. The 30+ day delinquency rate by

property sector improved in all five categories, led by

industrial which posted a 55 bps improvement to

8.39% aer backing up by 25 bps the prior month.



17/21


issues at 0.26% and 30year bond posng the highe

at 5.24% for the quarter. The Barclays U.

Government Index returned 0.13% in June, 1.34% fo

the second quarter and 2.66% YTD.

Treasury InflaonProtected Securies (TIPS

benefing from a comparavely long durao

returned 3.81% for the second quarter. The Barclay

U.S. Municipal Bond Index, also relavely lon

duraon, returned 2.59% for the quarter.

U.S. Government Securies

The UST market posted solid performance in the

second quarter, matching the posive return of the

first quarter. The support for UST prices came from a

variety of sources. Geopolical risk, especially the

turmoil in Ukraine and Iraq, provided a flightto

quality bid. A highly accommodave monetary policy

was cemented in place by the ECB, with combang

deflaon being the primary focus; the easy money

policy pushed European sovereign yields lower,

which, in turn, added to the downward pressure on

UST yields. Fed Chair Yellen helped the market as

well with some dovish comments that allayed

investor fears of a shitoward more aggressive policy

ghtening. Finally, speculave short posions, which

were instrumental in sparking the January rally,

persisted through the second quarter. Short covering

purchases were seen sporadically through the second

quarter.

Treasury yields fell modestly April. The rally picked

up speed in May and then held on through June. The

10year UST note yield ended the second quarter at

2.51%, down 21 bps since March 31 and down 51 bps

from 2013 yearend. The yield curve flaened

through June, for the full quarter and year to date.

The twoyear UST note yield rose three bps through

the second quarter, while the fiveyear note fell 11

bps in yield, the 30year bond yield fell 22 bps.

Returns followed a similar paern, with the twoyear

note posng the lowest return among the benchmark



18/21


19/21


Fed policy will influence the sectors performance

the second half of the year and beyond, as th

prospects of higher interest rates may pull investo

away from gold and silver if inflaonary fears remacontrolled.

Livestock gained 5.13% aer live cale and feeder

cale returned 9.00% and 18.37% respecvely. Lean

Hogs were the only loser in the sector down by

2.68%. In thefi

rst two quarters of 2014 the livestocksector was the biggest winner, spawning a 20.90%

return with lean hogs, live cale and feeder cale up

27.62%, 16.78% and 24.53%, respecvely.

Industrial metals built the largest gain of any sector in

the second quarter delivering a 6.96% return. This

solid performance lied the sector into the black for

the first half of the year; ending the quarter 1.23%

higher than it began at the end of 2013. Much of this

return was collected by nickel with a return of 19.27%

in the second quarter on the heels of its 14.23%

return in the first quarter. This gain was mostly due to

increased demand for the metal as major economies

improve across the globe. Every industrial metal

achieved a gain. The future outlook for this sector is

posive as downside risks to the supply of lead and

zinc could liprices higher. Copper on the other hand

could face a supply glut if economic acvity in China

and the U.S. do not connue to increase as mulyear

supply projects are coming online.

Precious metals gained 3.34% in the second quarter

as a safe haven asset due to geopolical risks

emanang from Ukraine, Iraq and Hong Kong. This

caps the precious metals first six months of 2014 as a

posive one, with the sector up 9.63%. It is likely that



20/21


2014 Asian equies were mixed with the Nikk

+3.17%, Shanghai Composite 0.74%, Hang Sen

+5.10%, and Kospi +1.07%. Japanese equies seem t

be supported by the prospect of large porol

allocaon shis into equies from Japanes

Government Bonds by large Japanese pension fund

Addionally, Japans first quarter growth was revise

substanally higher to 6.7% quarteroverquarte

(QoQ) annualized. Senment seems to be rising o

the possibility the PBoC will engage in moneta

easing to support growth across the country. India

equies, as measured by the SENSEX, rallied 13.76

in second quarter as Modi was elected to Prim

Minister. The market believes the new PM w

embark on farreaching reforms that will ulmate

boost growth.

Global Equies

Global equies as measured by the Morgan Stanley

Capital Internaonal All Country World Index (MSCI

ACWI) posted a 1.71% gain in June, while rallying

5.10% in the second quarter of 2014. U.S. equies

performed well in June with the S&P 500 and Dow

Jones up 1.91% and 0.65%, respecvely. Nasdaq and

Russell 2000 posted substanal gains up 3.9% and

5.15%, respecvely. US equies achieved stellar

returns during Q2 2014 with S&P 500, Dow Jones,

Nasdaq, and Russell 2000 up 5.52%, 3.08%, 6.07%,

and 3.57%, respecvely. The macro data out of the

U.S. was mixed in the second quarter with strong

labor data; however, first quarter GDP was revised

significantly lower to 2.9%. The Fed connued to

taper its monthly asset purchases by $10 billion as

expected at each of the FOMC meengs during the

quarter.

In Europe, equies were generally lower in June with

the DAX 1.11%, CAC 2.14%, and FTSE 1.47%. In the

periphery, equies were mixed with the FTSEMIB

1.60% and IBEX +1.16%. However, in the second

quarter European equies were generally higher with

the DAX +2.56%, CAC +0.26%, and FTSE +1.94% while

peripheral equies were mixed. The macro data

across the Eurozone was on the soer side with

inflaon connuing to run well below the ECBs

target. The ECB lowered its enre interest rate

corridor, taking deposit rates negave. At the same

me the central bank introduced a targeted long

term refinancing operaon (TLTRO), halted the

sterilizaon of Securies Market Programme (SMP),

announced preparatory work on purchases of asset

backed securies, and opened the door for outright

quantave easing.

Asian equies were mixed for the month of June with

the Nikkei +3.62%, Shanghai Composite 0.09%, Hang

Seng +0.47%, and Kospi +0.36%. Similarly, during Q2



21/21

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