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1

BOND INDEX ALMANAC | April 18, 2019

QUARTERLY PERFORMANCE REVIEW Phil Galdi, Head of Indices

ICE Data Services │ ICE Data Indices

Preston Peacock, Director

ICE Data Services │ ICE Data Indices

ICE Index Hotline: New York: +1 212-497-3008 London: +44 (0) 20-7429-7128 Email: [email protected]

Table of Contents:

Global credit markets at a glance……………….2 US High Grade……….…8 US Municipals…….16 Europe High Grade……22

High Yield…….33 Emerging Markets……45 Return Attributions…….60 Correlation……..….63 Appendix…………….….64

Q1: solid curve gains with a big helping of spread gains on the side

The global bond markets enjoyed solid gains in Q1. Curve rallies in most benchmark governments lifted all

boats but the good news did not stop there as credit markets topped off the curve gains with solid helping of

positive excess returns. (p 2)

This was one of the best one-two punches the US Broad Index has seen

A large spread rally on top of a large curve rally is not unheard of but the Q1 performance ranks among the best

one-two punches the US Broad Market Index has ever seen. (p 8)

Brexit uncertainty did not seem to affect Corporate bond performances

The uncertainty of when and how Brexit might happen hung over Q1 like a dark cloud. And yet there is no

discernible evidence in the index results to suggest that it swayed Corporate bond performances one way or the

other. (p 22)

High Yield sector spreads are rich across the board

All Global High Yield Index sector spreads are below their 10 year averages with only one , Retail, falling within

10% of its historical average. All other sectors are more than 10% below their 10 year averages and half are

more than 25% below their 10 year averages. (p 33)

Another good Q1 for EM but watch out ahead

The EM composite index bounced back from 2018’s loss with another strong opening quarter, but the months

ahead could prove difficult as the index has, on average, booked losses in Q2, 3 and 4. (p 45)

08

Fall

mailto:[email protected]


2

Global credit markets at a glance

The global bond markets enjoyed solid gains in Q1. Curve rallies in most

benchmark governments lifted all boats as Q1 total returns accounted for a

good portion of, and in some cases eclipsed, the 12-month returns of most

indices. But the good news did not stop there as credit markets topped off

the curve gains with solid helping of positive excess returns.

Chart 1: Global Credit Market Total Returns by Sector and Rating (local currency terms)

Chart 2: Global Credit Market Excess Returns by Sector and Rating

4.75

2.94

5.01

5.55

6.75

5.00

4.00

3.14

5.03

4.41

2.20

2.68

2.17

2.68

-1.93

-4.35

4.72

3.59

4.92

4.09

4.31

4.31

5.69

4.23

4.21

3.90

3.09

3.57

-6.0 -4.0 -2.0 0.0 2.0 4.0 6.0 8.0

EM Local Corp (USD)

EM Local Sov (USD)

EM External Corporate

EM External Sovereign

Global HiYld

Global BBB Corp

Global A Corp

Global AA Corp

Global AAA Corp

Global Corps

Global Collat

Global Quasi

Global Govts

Global Broad IG

12-mo. Total Return 3-mo. Total Return

0.77

3.28

3.18

5.33

2.95

1.96

1.29

1.78

2.37

0.45

0.70

1.35

0.55

0.95

-0.97

1.54

0.08

0.39

0.71

0.45

0.29

0.29

0.02

0.23

-2.0 -1.0 0.0 1.0 2.0 3.0 4.0 5.0 6.0

EM Local Corp

EM External Corp

EM External Sov

Global HiYld

Global BBB Corp

Global A Corp

Global AA Corp

Global AAA Corp

Global Corps

Global Collateralized

Global Quasi-Gvt

Global Non-Sovereign

12-mo. Excess Return 3-mo. Excess Return


3

With the sole exception of Japan, spreads tightened across the board, in

most cases moving 20-30bp lower or more.

Chart 3: Quarterly change in spread by currency/sector (excluding rebalancing impact)

Table 1: Global Spread Recap 30-Jun-18 3-Month Change

Spreads vs Govts All Investment

Grade AAA AA A BBB High Yield All Investment

Grade AAA AA A BBB High Yield

USD 127 64 66 96 163 405 -32 -14 -21 -28 -39 -128 EUR 125 62 66 98 159 392 -29 -20 -19 -24 -35 -114 GBP 157 71 83 136 199 560 -21 -11 -14 -17 -26 -74 CAD 131 62 74 125 169 398 -18 -3 -20 -15 -22 -40 AUD 119 85 89 124 150 n.a. -3 0 -5 -1 -8 n.a. JPY 50 n.a. 32 52 72 n.a. 3 n.a. 5 4 -4 n.a.


4

The volume of investment grade rating migrations fell back in Q1-19 after

spiking higher the prior quarter. Even more notably, the amount of upgrades

significantly outpaced that of downgrades ( $213bn vs $130bn) – a reversal

of Q4.

Table 2: Global High Grade Corporate Index Rating Migrations Quarter Total Downgrades Upgrades Fallen Angels Defaults

#Issuers #Issuers % #Issuers % # Issuers % #Issuers % Global 2,125 37 1.7 34 1.6 8 0.4 1 0.0 USD 1,157 21 1.8 25 2.2 6 0.5 1 0.1 Pan-Europe 828 14 1.7 15 1.8 0 0.0 0 0.0 EUR 691 13 1.9 13 1.9 0 0.0 0 0.0 GBP 308 2 0.6 4 1.3 0 0.0 0 0.0 JPY 92 2 2.2 0 0.0 0 0.0 0 0.0 CAD 185 2 1.1 4 2.2 0 0.0 0 0.0 AUD 140 2 1.4 0 0.0 0 0.0 0 0.0

$ParVal $ParVal % $ParVal % $ParVal % $ParVal %

Global 10,456,434 129,662 1.2 213,152 2.0 13,481 0.1 17,504 0.2 USD 6,599,240 83,537 1.3 169,952 2.6 12,481 0.2 17,504 0.3 Pan-Europe 2,937,294 37,466 1.3 36,509 1.2 0 0.0 0 0.0 EUR 2,507,044 34,958 1.4 33,906 1.4 0 0.0 0 0.0 GBP 430,250 2,508 0.6 2,603 0.6 0 0.0 0 0.0 JPY 152,671 3,614 2.4 0 0.0 0 0.0 0 0.0 CAD 324,214 1,123 0.3 6,690 2.1 0 0.0 0 0.0 AUD 73,840 852 1.2 0 0.0 0 0.0 0 0.0

# Bonds # Bonds % # Bonds % # Bonds % # Bonds %

Global 14,335 213 1.5 306 2.1 26 0.2 29 0.2 USD 8,096 136 1.7 235 2.9 24 0.3 29 0.4 Pan-Europe 3,805 47 1.2 49 1.3 0 0.0 0 0.0 EUR 3,022 44 1.5 42 1.4 0 0.0 0 0.0 GBP 783 3 0.4 7 0.9 0 0.0 0 0.0 JPY 479 16 3.3 0 0.0 0 0.0 0 0.0 CAD 924 5 0.5 22 2.4 0 0.0 0 0.0 AUD 386 3 0.8 0 0.0 0 0.0 0 0.0 Last 12mo Total Downgrades Upgrades Fallen Angels Defaults

#Issuers # Issuers % # Issuers % # Issuers % #Issuers % Global 2,227 145 6.5 175 7.9 27 1.2 1 0.0 USD 1,208 83 6.9 104 8.6 15 1.2 1 0.1 Pan-Europe 854 59 6.9 79 9.3 5 0.6 0 0.0 EUR 714 46 6.4 70 9.8 3 0.4 0 0.0 GBP 319 24 7.5 20 6.3 2 0.6 0 0.0 JPY 97 7 7.2 9 9.3 0 0.0 0 0.0 CAD 191 15 7.9 16 8.4 0 0.0 0 0.0 AUD 154 5 3.2 12 7.8 0 0.0 0 0.0


Global 11,483,925 596,460 5.2 948,864 8.3 34,886 0.3 17,504 0.2 USD 7,304,037 373,698 5.1 612,234 8.4 27,381 0.4 17,504 0.2 Pan-Europe 3,133,997 182,136 5.8 234,064 7.5 3,605 0.1 0 0.0 EUR 2,676,375 147,900 5.5 213,527 8.0 1,965 0.1 0 0.0 GBP 457,622 34,236 7.5 20,537 4.5 1,639 0.4 0 0.0 JPY 180,780 7,296 4.0 11,469 6.3 0 0.0 0 0.0 CAD 353,419 17,025 4.8 73,717 20.9 0 0.0 0 0.0 AUD 85,727 4,085 4.8 5,200 6.1 0 0.0 0 0.0


Global 15,720 869 5.5 1,163 7.4 73 0.5 29 0.2 USD 8,862 497 5.6 706 8.0 56 0.6 29 0.3 Pan-Europe 4,076 244 6.0 286 7.0 9 0.2 0 0.0 EUR 3,235 175 5.4 248 7.7 5 0.2 0 0.0 GBP 841 69 8.2 38 4.5 4 0.5 0 0.0 JPY 567 23 4.1 28 4.9 0 0.0 0 0.0 CAD 1,004 70 7.0 95 9.5 0 0.0 0 0.0 AUD 459 13 2.8 27 5.9 0 0.0 0 0.0 Note: Analysis based on the Global Broad Market Corporate Index (G0BC) over the periods indicated.


5

High yield rating migration volume was little changed QoQ, but – like

investment grade – shifted in favor of upgrades.

Table 3: Global High Yield Corporate Index rating migrations Quarter Total Downgrades Upgrades Rising Stars Defaults

# Issuers # Issuers % # Issuers % # Issuers % # Issuers % Global 1,136 65 5.7 40 3.5 9 0.8 1 0.1 USD 873 50 5.7 30 3.4 7 0.8 1 0.1 Pan-Europe 342 17 5.0 12 3.5 2 0.6 0 0.0 EUR 289 12 4.2 12 4.2 2 0.7 0 0.0 GBP 69 5 7.2 0 0.0 0 0.0 0 0.0 CAD 20 1 5.0 1 5.0 1 5.0 0 0.0


Global 1,633,345 69,015 4.2 91,774 5.6 31,584 1.9 2,616 0.2 USD 1,265,107 56,662 4.5 79,696 6.3 28,741 2.3 2,616 0.2 Pan-Europe 360,480 12,129 3.4 10,282 2.9 1,046 0.3 0 0.0 EUR 315,514 8,721 2.8 10,282 3.3 1,046 0.3 0 0.0 GBP 44,966 3,408 7.6 0 0.0 0 0.0 0 0.0 CAD 7,758 225 2.9 1,796 23.2 1,796 23.2 0 0.0


Global 2,516 119 4.7 113 4.5 33 1.3 5 0.2 USD 1,879 97 5.2 93 4.9 29 1.5 5 0.3 Pan-Europe 606 21 3.5 18 3.0 2 0.3 0 0.0 EUR 500 15 3.0 18 3.6 2 0.4 0 0.0 GBP 106 6 5.7 0 0.0 0 0.0 0 0.0 CAD 31 1 3.2 2 6.5 2 6.5 0 0.0 Last 12mo Total Downgrades Upgrades Rising Stars Defaults

# Issuers # Issuers % # Issuers % # Issuers % # Issuers % Global 1,270 169 13.3 181 14.3 24 1.9 14 1.1 USD 970 131 13.5 151 15.6 18 1.9 13 1.3 Pan-Europe 382 48 12.6 43 11.3 9 2.4 1 0.3 EUR 318 39 12.3 40 12.6 8 2.5 1 0.3 GBP 81 12 14.8 4 4.9 1 1.2 0 0.0 CAD 23 1 4.3 3 13.0 1 4.3 0 0.0


Global 1,895,688 223,178 11.8 307,495 16.2 61,128 3.2 8,993 0.5 USD 1,456,562 175,412 12.0 253,243 17.4 49,163 3.4 8,348 0.6 Pan-Europe 430,727 47,653 11.1 51,483 12.0 10,169 2.4 646 0.2 EUR 372,739 39,952 10.7 49,327 13.2 9,973 2.7 646 0.2 GBP 57,988 7,701 13.3 2,156 3.7 195 0.3 0 0.0 CAD 8,398 112 1.3 2,770 33.0 1,796 21.4 0 0.0


Global 2,938 356 12.1 424 14.4 77 2.6 19 0.6 USD 2,185 271 12.4 338 15.5 58 2.7 17 0.8 Pan-Europe 718 84 11.7 80 11.1 17 2.4 2 0.3 EUR 584 66 11.3 74 12.7 16 2.7 2 0.3 GBP 134 18 13.4 6 4.5 1 0.7 0 0.0 CAD 35 1 2.9 6 17.1 2 5.7 0 0.0 Note: Analysis based on the Global High Yield Index (HW00) over the periods indicated.


6

While not particularly high by historical standards, the $13bn entering the

Global High Yield Index due to downgrades was the largest for a calendar

quarter since Q4-17, and represents half of the total seen in all of 2018.

Table 4: Fallen Angels Entering the Global High Yield Indices (face value USD terms in millions) USD EUR GBP CAD Global

Q1 2016 93,029 18,950 575 - 112,554

Apr 2,807 555 - - 3,362

May 8,671 - - - 8,671

Jun 2,650 - - - 2,650

Q2 2016 14,128 555 - - 14,683

Jul 3,500 - - - 3,500

Aug 3,790 - - - 3,790

Sep 18,150 562 - - 18,712

Q3 2016 25,440 562 - - 26,002

Oct 5,350 1,688 - - 7,038

Nov 1,150 - - - 1,150

Dec 4,900 - - - 4,900

Q4 2016 11,400 1,688 - - 13,088

2016 143,997 20,281 494 - 164,772

Jan 1,950 - - - 1,950

Feb 7,800 535 - - 8,335

Mar - - - - -

Q1 2017 9,750 535 - - 10,285

Apr 1,200 - - - 1,200

May 1,000 2,566 - - 3,566

Jun 3,927 2,965 - - 6,892

Q2 2017 6,127 5,531 - - 11,658

Jul 1,000 1,182 - - 2,182

Aug 1,100 - - - 1,100

Sep - - - - -

Q3 2017 2,100 1,182 - - 3,282

Oct 4,580 2,402 - - 6,982

Nov 22,346 8,406 - - 30,752

Dec 1,750 961 566 - 3,277

Q4 2017 28,676 11,769 566 - 41,011

2017 46,653 19,394 566 - 66,613

Jan 625 - - - 625

Feb 2,175 - - - 2,175

Mar 5,700 615 - - 6,315

Q1 2018 8,500 615 - - 9,115

Apr 1,400 759 209 - 2,368

May 5,000 1,518 561 - 7,079

Jun 2,350 - - - 2,350

Q2 2018 8,750 - - - 11,797

Jul 4,600 - - - 4,600

Aug 950 581 - - 1,531

Sep 350 - - - 350

Q3 2018 5,900 581 - - 6,481

Oct 1,500 686 1,401 - 3,587

Nov 1,000 - - - 1,000

Dec 7,337 - - - 7,337

Q4 2018 9,837 686 1,401 - 11,924

2018 27,987 2,573 1,602 - 32,162

Jan 10,741 - - - 10,741

Feb 1,340 - - - 1,340

Mar 1,400 - - - 1,400

Q1 2019 13,481 - - - 13,481

Source: ICE BofAML Global Investment Grade Corporate (G0BC) and Global High Yield (HW00) Indices.


7

Defaults remained remarkably constrained, with just $2.6bn removed from

the index due to bankruptcy or missed payments.

Table 5: Defaults (face value USD terms in millions) USD EUR GBP CAD Global

Q1 2016 8,576 627 - - 9,203

Apr 3,505 - - - 3,505

May 15,709 - - 135 15,844

Jun 1,098 5,167 - - 6,265

Q2 2016 20,312 5,167 - 135 25,614

Jul 1,809 393 - - 2,202

Aug 3,321 - - - 3,321

Sep 705 - - - 705

Q3 2016 5,835 393 - - 6,228

Oct 2,039 - - - 2,039

Nov 1,003 334 - - 1,337

Dec 1,600 - - - 1,600

Q4 2016 4,642 334 - - 4,976

2016 39,365 6,189 - 130 45,684

Jan 5,061 - - - 5,061

Feb 382 - - - 382

Mar - - - - -

Q1 2017 5,443 - - - 5,443

Apr - - - - -

May 1,393 - - - 1,393

Jun 1,830 - - - 1,830

Q2 2017 3,223 - - - 3,223

Jul - 1,212 - - 1,212

Aug - - - - -

Sep 1,117 - - - 1,117

Q3 2017 1,117 1,212 - - 2,329

Oct 500 - - - 500

Nov 2,040 - - - 2,040

Dec 1,149 - - - 1,149

Q4 2017 3,689 - - - 3,689

2017 13,472 1,231 - - 14,703

Jan 1,390 357 982 - 2,729

Feb 2,997 - 233 - 3,230

Mar 8,748 - - - 8,748

Q1 2018 13,135 357 1,215 - 14,707

Apr 1,671 - - - 1,671

May - - - - -

Jun - - - - -

Q2 2018 1,671 - - - 1,671

Jul - - - - -

Aug - - - - -

Sep - - - - -

Q3 2018 - - - - -

Oct 1,811 - - - 1,811

Nov 525 - - - 525

Dec 1,460 657 - - 2,117

Q4 2018 3,796 657 - - 4,453

2,018 18,602 988 1,102 - 20,692

Jan - - - - -

Feb 2,616 - - - 2,616

Mar - - - - -

Q1 2019 2,616 - - - 2,616

Source: ICE BofAML Global Investment Grade Corporate (G0BC) and Global High Yield (HW00) Indices.


8

US High Grade

After a strong performance in Q4 the US Broad Index did twice as well in

Q1…

Q4 2018 (1.64%) was the best quarter the US Broad Market Index had seen in 2½ years and it almost doubled

that output in Q1 2019 as it posted a 2.99% return. That is just 8 basis points shy of matching the index’s best

quarter in 7½ years. Both the Q1 2019 and Q4 2018 results were achieved in similar interest rate

environments, though the average shift was actually a little larger in Q4 (-29bp vs -25bp). As a result, the index

did not generate quite as much from the curve factors in Q1 as it did in the prior quarter (1.48% Q1 2019 curve

factor return vs. 1.82 in Q4 2018).

…as credit markets turned the corner and joined the rally in the rates

markets.

The key difference that turned the tide in favor of Q1 2019 over Q4 20118 was the performance of the credit

markets. In Q4, the average spread of the ex-Treasuries portion of the US Broad Market Index widened 27bp,

almost perfectly offsetting the 29bp rally in the curve. In other words, bond yields in credit markets were fairly

stable. Conversely, in Q1 a credit spread rally of 16bp complimented the 25bp curve rally. That produced a

0.55% spread tightening gain, versus the 1.08% spread widening loss the index experienced in Q4, a

performance swing of 1.63%.

The curve and spread factors teamed up for one of the best one-two

quarterly punches on record.

A large spread rally on top of a large curve rally is not unheard of but the Q1 combined performance ranks among the best one-two punches the index has ever seen in its 22¼ year history. Since 1997, there have been 31 quarters (out of 89) in which the curve shifted lower by an average of 25bp or more. In eleven of those quarters, or roughly a third of the observations, the US Broad Market Non-Sovereign Index (UX00) also posted a positive excess return. But there was only one quarter among them that matched Q1 2019 in terms of the magnitude of the spread rally. In Q3 2009, in a very similar curve environment (26bp average shift) the index posted a 2.98% excess return that was roughly double the Q1 2019 result. But for the next best performance, in Q2 2003, the index could only muster up half as much excess return as it did in Q1 2019.

The Broad Non-Sovereign Index includes a fair amount of government related credit risk, including US

mortgages, US agencies and foreign government debt. But if we look at the Corporate Index we find similar

results. The Corporate Index had 12 positive excess returns during the 31 quarters that the curve rallied by

25bp or more. And once again, only Q3 2009 saw a better result than Q1 2019 (2.98% Q3 2009 vs. 1.41% Q4

2019 excess return).


9

Exhibit A: Quarters with large curve gains and spread rallies

QE Date Curve Shift

Broad ex-Treasuries Index

(UX00) Corporate Index

(C0A0)

9/30/2009 (0.26) 2.98 5.82

3/31/2019 (0.25) 1.41 2.58

6/30/2003 (0.32) 0.73 2.16

9/30/2010 (0.37) 0.73 1.68

6/30/2016 (0.30) 0.44 1.02

9/30/2006 (0.48) 0.40 0.37

3/31/2014 (0.28) 0.39 0.87

6/30/1997 (0.37) 0.39 0.11

9/30/2004 (0.44) 0.33 0.55

3/31/2004 (0.37) 0.18 0.06

9/30/1997 (0.37) 0.02 0.13

So far 2018-2019 is looking very similar to 1994-1995 for BBB Corporates.

The Q1 spread rally had a strong rating bias and the lower the better. BBB excess returns were almost a

percent higher than single-As (3.13% vs. 2.17%) and a little more than double the AA excess return (1.49%).

That lifted the BBB total return to an impressive 5.58% – its best showing in 9½ years. That is also the seventh

best BBB quarterly total return on record (out of 121 observations going back to 1989). Two of the better

performances came in 2009 during the height of the post financial crisis recovery rally and two came in 1995

following a full year loss in the prior year. The 1995 comparison is particularly interesting. In 1994, the BBB

Corporate Index lost 2.59% which is very close to the 2.82% loss it recorded in 2018. In Q1 1995 the index

gained 5.86% versus 5.58% in Q1 2019. The index then went on to gain 7.30% in Q2 1995 and another 7.27%

in H2 1995.

Exhibit B: US Corporate Index returns by rating

3.13

2.17

1.49

1.75

-0.03

5.58

4.59

3.73

4.98

2.18

-1.0 0.0 1.0 2.0 3.0 4.0 5.0 6.0

BBB Corp

A Corp

AA Corp

AAA Corp

Treasury

3-mo. Total Return 3-mo. Excess Return


10

Energy, Telecom and Media ranked on top in Q1 but do not look so good in

terms of 10 year information ratios.

All Corporate sectors did well in Q1 with the “worst” performer, Financial Services, beating risk-matched Treasuries by a hefty 1.64%. At the other end of the spectrum, four sectors topped the 3% excess return mark for the quarter: Telecom (3.79%), Energy (3.72%), Media (3.31%) and Leisure (3.08%). Leisure accounts for less than half a percent of the index capitalization and therefore has little impact on the index bottom line either way. But the other three all have meaningful representation in the index, particularly Energy which currently weighs in with an 11.2% share.

On one hand, the three big winners do not appear to be flashes in the pan. They have three of the five best excess returns over the last three years with Energy on top and Media and Telecom ranking fourth and fifth, respectively. But if we look over the longer ten year horizon they all fall in the middle third of the rankings. And if we look at the ten year information ratios they have three of the four worst performances in the index with Energy on bottom follow by Telecom in next to last place and Media fourth worst ahead of Healthcare.

Exhibit C: US spread & excess return by sector

Option-Adjusted Spread (OAS) Excess return %

Current spread multiple vs Annualized Information ratio

Sector %wt* Eff.Dur. Current QoQ YoY 10yr high 10yr low 10yr avg 3mo 1yr 3yrs 5yrs 10yrs 3yrs 5yrs 10yrs

US Corp Index 26.2 7.18 127 -32 10 0.2 1.4 0.8 2.58 0.33 2.60 1.10 3.90 0.35 0.12 0.23

Banking 6.0 5.01 108 -39 1 0.2 1.4 0.6 2.51 1.18 2.25 1.43 4.75 0.36 0.21 0.25

Financial Services 2.3 6.00 128 -37 7 0.1 1.3 0.7 1.64 0.29 2.72 1.61 5.03 0.51 0.26 0.26

Insurance 4.0 8.01 141 -23 16 0.2 1.4 0.7 2.37 0.27 3.14 1.40 6.66 0.40 0.16 0.25

Automotive 2.7 4.15 146 -32 36 0.2 2.1 1.0 1.82 -0.85 1.33 0.75 3.68 0.26 0.11 0.32

Basic Industry 4.6 7.33 167 -33 26 0.3 1.5 0.8 2.72 -0.49 4.38 1.19 4.20 0.41 0.08 0.20

Capital Goods 4.7 7.22 110 -34 11 0.3 1.4 0.9 2.57 -0.21 1.29 0.68 2.60 0.21 0.10 0.24

Consumer Goods 6.3 7.57 130 -25 26 0.4 1.6 1.0 2.58 -0.89 1.13 0.80 2.72 0.19 0.11 0.24

Energy 11.2 7.62 161 -40 12 0.3 1.4 0.8 3.72 0.58 5.05 0.77 3.73 0.40 0.05 0.17

Healthcare 9.3 8.13 112 -20 8 0.4 1.4 1.0 1.88 0.11 1.68 0.93 2.63 0.25 0.11 0.20

Leisure 0.4 4.55 151 -56 28 0.2 1.5 0.7 3.08 0.88 2.63 1.51 5.74 0.43 0.24 0.28

Media 3.5 8.70 146 -32 4 0.3 1.3 0.8 3.31 0.93 3.08 1.39 4.13 0.29 0.11 0.20

Real Estate 2.4 5.86 126 -30 3 0.1 1.2 0.6 2.00 1.42 2.90 1.80 6.43 0.52 0.31 0.30

Retail 3.2 8.29 103 -38 -8 0.3 1.2 0.8 2.65 0.37 1.83 0.98 3.07 0.25 0.11 0.21

Services 1.1 9.18 115 -23 8 0.3 1.2 0.8 1.87 0.58 2.67 1.57 3.37 0.50 0.27 0.30

Technology & Electronics 7.0 7.32 96 -30 4 0.3 1.3 0.8 2.54 0.71 2.41 1.31 2.78 0.34 0.17 0.23

Telecommunications 4.1 9.19 156 -34 8 0.4 1.3 0.9 3.79 1.35 3.04 1.67 3.51 0.29 0.13 0.18

Transportation 2.4 9.43 132 -20 15 0.2 1.4 0.8 2.35 -0.17 2.61 1.24 4.04 0.30 0.12 0.27

Utility 8.0 9.43 131 -28 14 0.3 1.4 0.9 1.85 -1.26 2.18 0.83 3.10 0.29 0.10 0.21

Foreign Govt. and Supras 4.8 5.28 68 -12 1 0.3 1.2 0.7 1.22 0.98 1.35 0.71 1.61 0.36 0.15 0.20

US Agencies 1.3 4.10 15 -1 2 0.2 1.3 0.7 0.18 0.07 0.52 0.39 0.58 0.60 0.45 0.30

Taxable Munis 0.7 10.57 118 -13 9 0.5 1.1 0.7 1.72 0.15 3.58 1.94 na 0.46 0.22 na

MBS 23.7 4.38 45 0 15 0.5 -2.4 1.4 0.36 0.27 0.38 0.33 0.82 0.16 0.09 0.21

ABS 1.4 1.97 65 -11 -8 0.1 1.2 0.6 0.24 0.67 1.20 0.83 2.33 0.86 0.68 0.47

CMBS 1.8 4.94 88 -13 0 0.1 1.1 0.4 1.00 1.05 1.74 1.25 5.70 0.50 0.34 0.38

*Note: Corporate sector weights based on share of US Corporate Index (C0A0); others based on share of US Broad Market Index (US00)


11

The last time the Corporate Index 12-month upgrade/downgrade ratio was

this high the financial crisis was less than a year away.

A little over a quarter trillion ($253.5bn) in Corporate Index debt saw a rating change during the quarter, which is down significantly from the prior quarter ($340.8bn) but still well above the quarterly average going back to 1999 ($185.4bn). The good news is that twice as much debt was upgraded as was downgraded ($170.0bn vs. $83.5bn). That is a sharp reversal from the prior quarter during which downgrades exceeded upgrades by more than a 3:2 margin ($212.0bn vs. $128.8bn). That is also the third time in the last four quarters that the quarterly upgrade/downgrade ratio has been near or above the 2.0 mark. As a result, the 12-month upgrade/downgrade ratio ended March at 1.64 – its highest reading since October 2007, just a little less than a year before the onset of the financial crisis.


12

BBB spreads rallied an impressive 39bp in Q1 but they remain 18bp wide of

their year ago levels.

Chart 4: US Corporate Index spread by rating

BBB spreads may not yet have returned to their year ago levels but single-A

spreads closed Q1 right where they stood on 3/31/2018.

Chart 5: US Corporate Index spread range (last 10 Years)

0

100

200

300

400

500

600

700

800

3/31

/200

9

9/30

/200

9

3/31

/201

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/201

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3/31

/201

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/201

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/201

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/201

7

3/31

/201

8

9/30

/201

8

3/31

/201

9

Sp

read

(bp

s)

All Inv. Grade AAA AA A BBB

All Inv. Grade AAA AA A BBB

hi 586 246 403 549 731

lo 91 51 53 72 117

3/31/2019 127 64 66 96 163

3/31/2018 117 64 74 96 145

0

100

200

300

400

500

600

700

800

Sp

read

(bp

s)


13

!0-year spreads are all below their averages but the BBB/A and A/AA spread

ratios are well above their averages over the last ten years.

Chart 6: 10 year maturity USD corporate spreads Chart 7: 10 year maturity USD corporate spread multiples

0

100

200

300

400

500

600

700

AA A BBB

AA avg A avg BBB avg

0.9

1.0

1.1

1.2

1.3

1.4

1.5

1.6

1.7

1.8

A vs AA BBB vs A

A vs AA avg BBB vs A avg


14

There was very little movement in the 5 and 10 year Sharpe ratios versus the end of 2018 and, as a result, the ranks of the three best and worst performers are unchanged.

Table 6: US 5- and 10-Year Sharpe ratios (as of 31 Mar 2019) Ann. Total Return Ann. S.D. Sharpe Ratio Chg QoQ

Index Ticker 5Yrs 10Yrs 5Yrs 10Yrs 5Yrs 10Yrs 5Yrs 10Yrs

3-Month Treasury Bill G0O1 0.74 0.43 0.23 0.19 US Broad Market US00 2.82 3.86 2.91 2.92 0.21 0.29 0.00 0.01

Corp/Govt Master B0A0 2.88 4.01 3.28 3.32 0.19 0.27 0.01 0.02

US Treasury G0Q0 2.34 2.49 3.48 3.67 0.14 0.19 0.00 0.02

1-3 Yr G1O2 0.98 1.04 0.81 0.80 0.08 0.19 0.02 -0.01

3-5 Yr G2O2 1.73 2.09 2.22 2.47 0.13 0.20 0.01 0.00

5-7 Yr G3O2 2.40 2.83 3.49 4.02 0.14 0.20 0.01 0.01

7-10 Yr G4O2 2.94 3.38 4.78 5.48 0.14 0.19 0.00 0.02

10+ Yr G9O2 5.36 5.04 9.72 10.65 0.15 0.17 -0.02 0.02

1-5 Yr GVQ0 1.29 1.46 1.38 1.45 0.11 0.20 0.01 0.00

5-10 Yr G6O2 2.63 3.06 3.98 4.65 0.14 0.19 0.00 0.02

1-10 Yr G5O2 1.71 2.01 2.15 2.46 0.13 0.20 0.01 0.01

US Agency G0P0 2.12 2.35 2.02 2.03 0.20 0.26 0.00 0.02

1-3 Yr G1P0 1.12 1.27 0.73 0.70 0.15 0.27 0.01 0.00

3-5 Yr G2P0 1.85 2.42 1.90 2.02 0.17 0.26 0.01 0.00

5-7 Yr G3P0 2.65 3.44 2.84 3.28 0.19 0.26 0.00 0.01

7-10 Yr G4P0 3.67 4.41 4.24 4.38 0.20 0.27 0.00 0.02

10+ Yr G9P0 5.30 5.46 6.52 7.36 0.21 0.22 -0.02 0.02

1-5 Yr GVP0 1.35 1.59 1.02 1.05 0.17 0.27 0.01 0.00

5-10 Yr G6P0 3.04 3.80 3.45 3.73 0.19 0.26 0.00 0.02

1-10 Yr G5P0 1.59 1.93 1.29 1.42 0.19 0.28 0.00 0.01

Inv. Grade Corp C0A0 3.74 6.77 3.72 4.38 0.23 0.29 0.01 0.01

1-3 Yr C1A0 1.89 3.59 0.90 1.80 0.36 0.30 0.01 0.00

3-5 Yr C2A0 2.83 5.32 2.07 2.99 0.29 0.32 0.03 0.01

5-7 Yr C3A0 3.91 7.33 3.14 4.23 0.29 0.32 0.03 0.00

7-10 Yr C4A0 4.17 7.63 4.13 5.07 0.24 0.29 0.01 0.01

10+ Yr C9A0 5.41 9.36 7.27 7.93 0.19 0.24 0.00 0.02

1-5 Yr CVA0 2.35 4.47 1.46 2.35 0.32 0.32 0.03 0.01

5-10 Yr C6A0 4.06 7.50 3.70 4.71 0.26 0.30 0.02 0.01

1-10 Yr C5A0 3.10 5.90 2.42 3.39 0.28 0.32 0.02 0.01

AAA C0A1 4.04 4.55 4.74 4.42 0.20 0.24 0.01 0.03

AA C0A2 3.46 5.18 3.34 3.67 0.23 0.28 0.01 0.02

A C0A3 3.58 6.33 3.55 4.25 0.23 0.28 0.01 0.02

BBB C0A4 3.94 7.91 4.12 4.98 0.22 0.29 0.01 0.01

Banking C0P0 3.45 7.10 2.59 4.51 0.30 0.27 0.02 0.02

Financial Services CFFS 3.96 7.60 2.72 4.32 0.34 0.32 0.00 0.04

Insurance CFIE 4.30 9.70 3.77 5.91 0.27 0.28 0.00 0.02

All Financials CF00 3.63 7.53 2.75 4.58 0.30 0.28 0.02 0.03

Automotive CIAU 2.57 5.85 2.53 3.34 0.21 0.30 0.02 0.04

Basic Industry CIBS 3.95 7.19 5.14 5.49 0.18 0.23 0.01 0.00

Capital Goods CICP 3.40 5.52 3.80 4.08 0.20 0.28 0.02 0.02

Consumer Goods CICS 3.47 5.58 3.88 4.18 0.19 0.28 0.02 0.01

Energy CIEN 3.54 6.83 5.59 5.58 0.15 0.23 0.02 0.01

Healthcare CHCR 3.85 5.71 4.28 4.58 0.21 0.27 0.01 0.01

Leisure CILE 3.57 8.18 2.86 5.36 0.27 0.25 0.03 0.07

Media CIME 4.49 7.44 5.12 5.63 0.21 0.26 0.00 0.01

Real Estate CIRE 4.14 9.15 3.18 5.53 0.31 0.27 0.01 0.03

Retail CIRL 4.03 6.37 4.55 4.87 0.19 0.26 0.01 0.02

Services CISE 4.57 6.70 4.42 4.76 0.24 0.30 0.00 0.01

Tech & Electronics CITE 3.81 5.53 3.56 3.85 0.25 0.29 0.01 0.02

Telecommunications C0R0 4.75 6.71 4.99 5.17 0.23 0.28 0.02 0.02

Transportation C0W0 4.44 7.32 4.86 5.11 0.22 0.28 0.01 0.01

All Industrials CI00 3.75 6.40 4.13 4.52 0.21 0.28 0.01 0.01

Utility C0Q0 4.11 6.49 4.76 5.05 0.21 0.27 0.00 0.02


15

Table 6: US 5- and 10-Year Sharpe ratios (as of 31 Mar 2019) Ann. Total Return Ann. S.D. Sharpe Ratio Chg QoQ


Mortgages M0A0 2.65 3.12 2.18 2.22 0.25 0.31 0.00 0.00

FN&FH 30 Yr MF30 2.96 3.30 2.35 2.32 0.27 0.32 0.00 0.00

GN 30 Yr MG1S 2.43 3.17 2.03 2.37 0.24 0.31 0.00 0.01

All 15 Yr M15A 2.06 2.53 1.96 1.92 0.19 0.27 0.01 0.01

CMBS Fixed Rate CMBS 2.95 7.59 2.41 4.48 0.26 0.29 0.01 0.04

Fixed Rate ABS R0A0 1.97 3.47 0.82 1.60 0.43 0.33 -0.01 -0.01

Reverse highlighted values are the top ranked sectors; shaded values are the bottom ranked sectors.

ABS and Treasuries define the top and bottom of the 5-year Sharpe ratio

range. Everything else is tightly clustered in between.

Chart 8: Trailing 5-year Sharpe ratios

Over the last year Corporates beat risk-matched Treasuries by just 0.33%.

That is less than a tenth of the 10-year annualized excess return.

Chart 9: US Corporate Index 12-month excess returns

0.00

0.10

0.20

0.30

0.40

0.50

0.60

0.70

0.80

Mar

-14

Jun-

14

Sep

-14

Dec

-14

Mar

-15

Jun-

15

Sep

-15

Dec

-15

Mar

-16

Jun-

16

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-16

Dec

-16

Mar

-17

Jun-

17

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Dec

-17

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-18

Jun-

18

Sep

-18

Dec

-18

Mar

-19

Tra

ilin

g 5

-yea

r S

har

pe

Rat

io

Treasuries Inv.Grade Corp MBS

ABS CMBS US Agencies

High Yield Emerging Mkts

-20

-15

-10

-5

0

5

10

15

20

25

30

Mar

-09

Sep

-09

Mar

-10

Sep

-10

Mar

-11

Sep

-11

Mar

-12

Sep

-12

Mar

-13

Sep

-13

Mar

-14

Sep

-14

Mar

-15

Sep

-15

Mar

-16

Sep

-16

Mar

-17

Sep

-17

Mar

-18

Sep

-18

Mar

-1912

- m

on

th e

xces

s re

turn

%

10yr Annualized Excess Return

Table 7: US Corporate Index 12-month excess return

10yr Ann. Excess Return 3.90 Current 0.33 Hi (Mar-10) 26.12 Lo (Mar-09) -15.78 Std. Dev 6.48


16

US Municipals The muni indices ran in the middle of the U.S bond market pack, but in Q1 that was not such a bad thing as a

25bp Treasury curve rally lifted all boats. With more duration exposure than most other U.S. bond market

indices munis gained more out of the Treasury curve rally, which boosted their returns 2% or more versus

1.86% for USD EM Sovereigns, 1.77% for the IG Corporate Index and just 1.01% for the HY Corporate Index.

But the tables were turned with respect to spread performance. The taxable muni index had a 0.83% spread

tightening gain for the quarter, which is very good considering it came on top of a strong curve rally, but it pales

in comparison IG Corporates and EM sovereigns, both of which gained more than 2% on spread tightening, and

HY Corporates which enjoyed a 4.55% spread tightening gain.

The tax-exempt muni indices also generate less income return than their Corporate counterparts with the muni

IG index lagging IG Corporates by 0.29% and the HY income differential at 0.57%. But they more than make

up for that difference when the returns are tax-adjusted. On an after-tax basis, the Q1 return gap between the

IG Corporate and IG tax-exempt muni index narrows by 1.36% to 0.70% after taxes from 2.06% on a pre-tax

basis. And on the high yield side the gap shrinks a substantial 2.36% to 1.73% after taxes from a 4.09%

differential on a pre-tax basis.

Chart 10: Pre-tax total return

Chart 11: After-tax total return (post liquidation method using 43.4% tax rate)

7.40

6.06

5.01

4.08

3.38

3.31

2.95

2.27

2.18

1.83

1.30

0.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00

8.00

High Yield EmergingMarkets

High GradeCorporates

Broad TaxMuni

Inflation-Linked

Tax ExemptMuni HY

Tax ExemptMuni IG

MBS Treasuries Agencies ABS

Pre

-Tax

To

tal R

ate

of

Ret

urn

%

3-month

4.19

3.43

2.84

2.46

2.31

2.14

1.91

1.28

1.23

1.03

0.74

0.00

1.00

2.00

3.00

4.00

5.00



Tax ExemptMuni HY

Broad TaxMuni

Tax ExemptMuni IG

Inflation-Linked

MBS Treasuries Agencies ABS

Aft

er-T

ax T

ota

l Rat

e o

f R

etu

rn %

3-month


17

When the comparison is adjusted to take account of both the tax advantage and differences in interest rate

exposures the gap between the tax-exempt muni and Corporate IG indices narrows to just 0.42%. But with a

pre-tax excess return that was nearly quadruple its tax-exempt muni HY counterpart, the HY Corporate Index

still held a sizable advantage over HY munis of nearly 2% on an after-tax excess return basis.

The degree to which the taxable muni index relied on its duration exposure in Q1 (8.76 years at the end of Q1)

was clearly evident in the after-tax excess return results. On that basis, taxable munis only managed to beat

the MBS, ABS and US Agency indices.

Chart 12: Pre-tax excess return vs Treasuries

Chart 13: After-tax excess return vs Treasuries (post-liquidation method using 43.4% tax rate)

5.77

3.51

2.58

1.49

1.33

1.16

1.00

0.36

0.24

0.18

0.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00



Tax ExemptMuni HY

Inflation-Linked

Broad TaxMuni

Tax ExemptMuni IG

MBS ABS Agencies

Pre

-Tax

Exc

ess

Ret

urn

%

3-month

3.27

1.98

1.46

1.41

1.04

0.75

0.66

0.21

0.14

0.10

0.00

1.00

2.00

3.00

4.00



Tax ExemptMuni HY

Tax ExemptMuni IG

Inflation-Linked

Broad TaxMuni

MBS ABS Agencies

Pre

-Tax

Exc

ess

Ret

urn

%

3-month


18

Yield Curve

The AAA GO curve shifted 30bp lower, on average, during Q1, or 5bp more

than the magnitude of the Treasury curve rally. AAA GOs did best in the

10-12 year maturity range where they outperformed comparable maturity

Treasuries by 10-12bp.

Chart 14: US Municipal AAA GO curve

The 10 year yield ratio dipped to 0.86 in February before closing the quarter

at 0.87 – levels it had not seen since June 2010.

Chart 15: Tax exempt AAA GO / Treasury yield ratios

1

1.5

2

2.5

3

3.5

1 3 5 7 9 11 13 15 17 19 21 23 25 27 29

Muni AAA 12/31/18 Muni AAA 3/31/19

25%

50%

75%

100%

125%

150%

175%

200%

225%

Mar

-09

Mar

-10

Mar

-11

Mar

-12

Mar

-13

Mar

-14

Mar

-15

Mar

-16

Mar

-17

Mar

-18

Mar

-19

2-year 5-year 10-year 30-year


19

Rating

The BBB sub-index outperformed higher rated credits in Q1, particularly in

March when it posted a +0.20% excess return versus -0.04% for next best

single-As. But the BBB Index still has a long way to go to recoup the ground

lost during the November 2018 to January 2019 credit downturn, which saw

its worst three month performance since November 2013 to January 2014.

Chart 16: Tax exempt excess returns vs. risk-matched AAA GOs

BBB spreads ended the quarter right about where they began (91bp vs. 90bp

at the start of the quarter). That is 23bp wide of the July-August 2016 lows.

Chart 17: Tax exempt spreads vs. AAA GOs

(0.75)

(0.50)

(0.25)

0.00

0.25

0.50

0.75

Apr

-18

May

-18

Jun-

18

Jul-1

8

Aug

-18

Sep

-18

Oct

-18

Nov

-18

Dec

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Jan-

19

Feb

-19

Mar

-19

Exc

ess

Ret

urn

%

AAA AA A BBB

-50

0

50

100

150

200

250

300

350

400

Sp

read

(bp

s)

All Municipals AAA AA A BBB


20

Sector

Last year’s top two performers (IDRs 4.06% and Tobacco 3.81%) sank to the very bottom of the rankings in Q1

as they were the only sectors that failed to break the 1% return mark. The shortfall in the most recent quarter

was enough to drop Tobacco all the way to 17th place (out of 20 sectors) for the last 15 months. The Single

Family Housing sector managed to break the 1% mark, but not by much (1.31%). That was only good enough

for 15th best in the index, which is a particularly poor showing given that this sector has significantly more

duration than the rest of the index (11.53 years vs. 8.84 years for next longest Hospitals). Adjusted for duration

risk, Single Family Housing had the second worst excess return in Q1 after Tobacco (-1.34% and -2.01%,

respectively). In just one quarter, Single Family Housing came within a few basis points of matching its 2018

full year excess return (-1.39%) – a level of underperformance that ranked as the worst in the index.

Table 7: Tax-exempt excess returns vs. risk-matched AAA GOs Total Return Excess Return

% wgt Effective Duration

Contr EffDur 3-Month 2018 3-Month 2018

By Rating Category: AAA 12.20 6.54 0.80 1.73 2.79 -0.28 -0.02

AA 52.88 6.72 3.55 1.63 2.77 -0.40 -0.14

A 25.01 7.22 1.81 1.48 3.20 -0.58 0.14

BBB 9.90 7.09 0.70 1.18 3.45 -0.85 0.43

By Sector GO - State 15.72 5.52 0.87 1.56 2.56 -0.38 -0.02

GO - Local 10.24 7.19 0.74 1.72 2.89 -0.32 -0.12

Total GO 25.95 6.18 1.60 1.62 2.69 -0.36 -0.06

Refunded 4.02 2.55 0.10 1.11 1.42 -0.07 0.09

Airport 5.23 7.48 0.39 1.51 3.39 -0.56 0.23

Education 5.28 8.16 0.43 1.83 3.13 -0.34 -0.18

Health 6.50 8.09 0.53 1.48 3.16 -0.68 -0.17

Hospitals 3.34 8.84 0.30 1.70 3.52 -0.54 -0.01

Housing - MF 0.61 7.67 0.05 1.17 2.67 -0.87 -0.43

Housing - SF 0.96 11.53 0.11 1.31 3.07 -1.34 -1.39

Industrial Development 2.11 7.22 0.15 0.83 4.06 -1.10 1.09

Leasing/Rental 5.09 5.96 0.30 1.63 2.64 -0.35 -0.07

Pollution Control 0.46 4.65 0.02 1.09 2.03 -0.56 -0.03

Power 2.98 5.97 0.18 1.49 2.54 -0.48 -0.16

Tax Revenues 12.61 7.09 0.89 1.79 3.12 -0.31 0.09

Tobacco 1.21 7.45 0.09 0.20 3.81 -2.01 0.56

Toll & Turnpike 5.84 8.04 0.47 1.54 3.41 -0.66 0.04

Transportation 7.28 6.72 0.49 1.46 3.12 -0.60 0.17

Utilities - Other 5.20 7.22 0.38 1.45 3.11 -0.63 0.05

Water & Sewer 4.71 7.20 0.34 1.74 2.86 -0.39 -0.24

Miscellaneous 0.60 6.77 0.04 1.89 3.05 -0.13 0.10

Total Revenue 70.03 7.36 5.15 1.56 3.14 -0.54 0.02

By Effective Duration 0-1 Year 2.82 0.50 0.01 0.81 2.56 0.27 1.07

1-2 Year 7.95 1.48 0.12 0.91 1.80 0.05 0.32

2-3 Year 8.14 2.48 0.20 1.24 1.79 0.00 0.22

3-4 Year 8.09 3.49 0.28 1.66 1.83 -0.01 0.27

4-5 Year 8.05 4.52 0.36 2.14 1.73 -0.02 0.28

5-6 Year 7.99 5.51 0.44 2.50 1.46 -0.10 0.26

6-7 Year 8.75 6.50 0.57 2.89 1.33 -0.13 0.41

7-8 Year 8.67 7.48 0.65 3.30 1.13 -0.13 0.56

8-9 Year 8.79 8.50 0.75 3.38 0.76 -0.32 0.55

9-10 Year 8.53 9.51 0.81 3.58 0.32 -0.29 0.45

10-11 Year 8.96 10.50 0.94 4.01 -0.28 -0.06 0.22

11-12 Year 6.23 11.44 0.71 4.33 -0.35 0.05 0.45

12+ Year 7.04 14.35 1.01 5.82 -1.92 0.94 0.02

Broad Index 100.00 6.86 6.86 2.95 1.04 0.00 0.35


21

State GO

With a duration of 10.68 years (versus 7.33 years for next longest Oregon and 5.52 years for the overall State

GO Index), West Virginia rode the curve rally to the top of the Q1 rankings. Unlike West Virginia, Oregon failed

to take full advantage of is duration advantage in the curve rally as it had the second lowest excess return in the

index, placing ahead of only California for the quarter (-0.33% and -0.37%, respectively). Conversely,

Connecticut and Illinois managed to tie for third in the Q1 total return rankings despite the fact that they had

average to slightly below average durations. The two had the best excess returns in the index with Illinois’

excess return helped by the yield advantage its bonds offer investors. However, New Jersey, another high

yielding state was unable to leverage its coupon advantage as it had the fifth lowest Q1 excess return in the

index.

Table 8: Tax-exempt state GOs excluding insured and refunded bonds

Total Return Excess Return

% wgt Effective Duration

Contr EffDur 3-Month 2018 3-Month 2018

By State: Connecticut 3.89% 4.52 0.17 3.31 1.55 1.08 0.42 Illinois 8.27% 5.15 0.41 3.31 2.94 0.81 1.95 West Virginia 0.09% 10.68 0.01 4.51 0.28 0.48 -0.74 Pennsylvania 6.71% 5.76 0.37 3.18 1.68 0.45 0.74 Michigan 0.15% 4.64 0.01 2.54 1.60 0.19 0.16 Mississippi 0.59% 7.14 0.04 3.44 0.78 0.18 0.24 Nevada 0.38% 3.93 0.01 2.07 1.10 0.12 -0.13 Rhode Island 0.10% 3.32 0.00 1.79 1.50 0.10 0.15 Massachusetts 11.01% 7.06 0.75 3.14 0.69 0.07 0.11 New Mexico 0.16% 4.09 0.01 1.99 1.15 0.07 -0.14 Maine 0.02% 2.92 0.00 1.55 1.66 0.04 0.08 Florida 1.14% 3.57 0.04 1.59 1.31 0.04 0.16 Ohio 1.23% 4.31 0.05 2.18 1.23 0.02 0.08 Arkansas 0.33% 2.26 0.01 1.29 1.41 0.02 0.06 Minnesota 1.53% 3.86 0.06 1.97 1.31 0.01 0.01 Virginia 0.25% 3.00 0.01 1.62 1.15 -0.01 -0.17 Delaware 0.30% 4.37 0.01 1.99 0.98 -0.03 -0.12 North Carolina 1.28% 3.49 0.04 1.76 1.31 -0.04 -0.07 New Hampshire 0.01% 1.46 0.00 0.85 1.71 -0.05 0.12 Utah 0.39% 3.95 0.01 1.96 1.33 -0.05 -0.14 Georgia 4.08% 5.53 0.22 2.58 0.92 -0.05 -0.15 Hawaii 3.17% 5.83 0.18 2.71 1.20 -0.07 0.21 Alabama 0.11% 3.31 0.00 1.63 1.43 -0.09 0.16 Washington 6.49% 5.60 0.35 2.56 0.98 -0.10 0.15 Wisconsin 1.01% 3.51 0.03 1.75 0.72 -0.10 0.22 Tennessee 0.25% 3.09 0.01 1.51 1.21 -0.12 -0.15 New York 0.34% 4.06 0.01 1.73 1.49 -0.14 0.53 Maryland 5.52% 4.75 0.25 2.22 1.17 -0.14 -0.05 South Carolina 0.05% 1.58 0.00 0.86 1.76 -0.20 0.21 New Jersey 0.55% 4.69 0.03 2.09 2.43 -0.21 1.28 Louisiana 0.94% 4.32 0.04 1.95 1.55 -0.22 0.50 Texas 5.39% 6.23 0.32 2.55 0.54 -0.28 -0.08 Oregon 0.20% 7.33 0.01 2.65 0.59 -0.33 0.08 California 34.05% 5.62 1.85 2.22 1.02 -0.37 0.02 GO - State (Total) 100.00% 5.52 5.33 2.56 1.23 -0.02 0.26


22

Europe High Grade

You know it was a good quarter when governments gained 2.5-3.5% and all corporate sector and rating excess returns were still well over 1%.

You know it was a good quarter when benchmark governments gained 2.5-3.5% and all corporate sectors and

rating categories still beat risk matched governments by at least 1%, and in many cases by 2-3% or more. That

is exactly how things went in the European high grade bond markets in Q1 2019. The German Government

Index gained 2.12% on the quarter, the Euro Sovereign Index was up 2.54% and Gilts scored a 3.59% Q2

return ‒ their best since Q2 2016.

Against that backdrop, the Euro and Sterling Corporate rating sub-indices posted excess returns that ranged

from just over 1% for the AA Euro and AAA Sterling Indices to just under 3% for the Sterling BBB Index. It is

not often that all rating sub-indices in both markets break the 1% excess return mark in the same quarter. In

fact, it has happened only six times in the 22¼ year history of the index ‒ twice in 2009, twice in 2012, once in

2016 and the most recent occurrence ‒ a rate of just under 7%.

Exhibit A: Euro Index quarterly returns by rating Exhibit B: Sterling Index quarterly returns by rating

The uncertainty of Brexit did not seem to sway Corporate results in Q1.

The uncertainty of when and how Brexit might happen hung over Q1 like a dark cloud. And yet there is no

discernible evidence in the index results to suggest that it swayed Corporate bond performances one way or the

other. Both the Sterling and Euro Corporate Indices beat risk-matched benchmark governments by more than

2% on the quarter. And if we break that down further, in most cases the results are very similar across sectors

as well with no particular bias in one currency over the other. The one notable exception to that rule was

Capital Goods, where Sterling surged on the back of GE as it rebounded from a -14% excess return in Q4. GE

accounts for almost two-thirds of the Sterling Capital Goods sector versus “only” a 20+% exposure to the name

in the Euro Capital Goods sector.

2.61

1.71

1.22

1.70

0.45

3.61

2.81

2.26

3.95

2.54

0.0 1.0 2.0 3.0 4.0 5.0

BBB Corp

A Corp

AA Corp

AAA Corp

EMU Govts


2.75

2.22

1.40

1.12

0.04

4.87

4.97

3.84

3.26

3.59

0.0 1.0 2.0 3.0 4.0 5.0 6.0

BBB Corp/Coll

A Corp/Coll

AA Corp/Coll

AAA Corp/Coll

Gilts



23

Exhibit C: Euro and Sterling Corporate Q1 2019 excess returns by sector

Euro and Sterling Corporate Index 3 year information ratios are identical.

There is a little more of a bias in the 3 year information ratios, where Euro sectors beat their Sterling

counterparts almost two-thirds of the time. Once again Capital Good was an outliers, but unlike the Q1 2019

results, Sterling Capital Goods have underperformed their Euro counterparts by a wide margin over the last

three years. Services saw an even larger disparity and once again it was the Sterling sector that

underperformed. Despite these biases, on the whole the Euro and Sterling Corporate Index 3 year information

ratios are identical at 0.28.

Exhibit D: Euro and Sterling Corporate 3 year information ratios by sector

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

Euro Sterling

0.0

0.1

0.2

0.3

0.4

Euro Sterling


24

Rating migrations improved significantly relative to Q4 2018.

The Euro Corporate Index upgrade/downgrade ratio came up just shy of parity in Q1 as $35.0bn was

downgraded versus $33.9bn that was upgraded. That is a big improvement over Q4 2018, a period in which

downgrades outweighed upgrades by a 3:2 margin. Sterling Corporates enjoyed a much larger turn-around as

the quarterly upgrade/downgrade ratio for that index quadrupled from just 0.23 in Q4 2018 to 1.04 in the most

recent reporting period. Unfortunately, the downwardly based Q4 ratio came on a total volume of $19.6bn in

rating changes versus just $5.1bn in rating actions taken in Q1 2019.


25

Europe Corporates

After climbing to near five-year highs, in Q1 spreads saw a fairly dramatic

rally across all sectors.

Table 9: Euro Corporate Index (ER00) spread & excess return by sector

Option-Adjusted Spread (OAS) Excess return %


Sector %wgt Eff.Dur. Current QoQ YoY 10yr high 10yr low 10yr avg 3mo 1yr 3yrs 5yrs 10yrs 3yrs 5yrs 10yrs

Euro Corp Index 100.0 5.11 125 -29 28 0.3 1.7 0.8 2.10 1.10 1.83 1.34 2.88 0.28 0.18 0.25

Automotive 6.8 4.70 145 -31 49 0.3 2.1 1.1 2.15 0.22 1.72 0.99 2.36 0.23 0.08 0.25

Banking 28.7 4.20 116 -28 23 0.3 1.6 0.7 1.73 1.06 1.81 1.45 3.07 0.31 0.24 0.24

Basic Industry 5.6 4.89 114 -31 28 0.3 1.7 0.8 2.00 1.02 2.11 0.90 2.68 0.34 0.09 0.23

Capital Goods 3.3 5.92 118 -36 33 0.4 1.7 0.9 2.66 0.34 1.03 0.82 2.22 0.15 0.11 0.26

Consumer Goods 6.5 5.91 105 -21 22 0.4 1.6 1.0 1.85 1.18 1.05 0.96 2.19 0.17 0.12 0.29

Energy 5.4 5.09 131 -43 21 0.4 1.6 0.9 2.71 1.60 2.60 1.16 2.42 0.32 0.10 0.24


Healthcare 4.5 6.16 98 -22 16 0.5 1.8 1.1 1.86 1.86 1.39 1.07 1.64 0.21 0.14 0.25

Insurance 4.8 5.44 220 -36 53 0.3 1.9 0.9 3.48 1.22 4.01 2.55 6.65 0.29 0.16 0.23

Leisure 0.2 4.04 133 -18 43 0.2 1.8 0.7 1.37 1.16 1.92 1.86 4.35 0.39 0.34 0.29

Media 1.2 4.73 116 -30 20 0.3 1.5 0.8 2.01 1.19 2.25 1.56 3.39 0.32 0.19 0.36

Real Estate 4.4 5.50 155 -44 35 0.2 1.7 0.9 3.14 1.20 2.00 1.78 4.14 0.27 0.20 0.31

Retail 1.5 5.59 107 -27 22 0.3 1.6 0.9 1.65 0.71 1.11 0.55 1.98 0.22 0.06 0.21

Services 1.0 5.04 124 -21 34 0.2 1.7 0.8 1.69 0.97 1.60 1.38 3.36 0.33 0.26 0.38

Technology & Electronics 2.5 5.65 89 -20 20 0.3 1.6 0.7 1.67 1.66 1.72 1.24 2.13 0.28 0.16 0.22


Transportation 4.6 5.93 117 -28 35 0.4 1.8 0.9 2.09 0.45 1.00 1.07 2.47 0.17 0.17 0.23

Utility 10.4 5.59 118 -24 24 0.5 1.5 0.9 2.06 1.46 1.84 1.49 2.22 0.27 0.17 0.23

Higher quality segments did better in the Q1 spread rally on a percentage

basis: AAA, -24%; AA -22%; A -20%; BBB -18%.

Chart 18: Euro Corporate Index spread by rating

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Euro Corps AAA AA A BBB


26

Despite the rally, spreads remain higher YoY, with BBBs widening the most

both on an absolute and percentage basis.

Chart 19: Euro Corporate Index spread range (last 10 years)

Rating spreads are relatively near their 10-year averages. But while the

BBB-A spread multiple is also at the 10 year average, the A-AA gap is

relatively high.

Chart 20: 10-year maturity EUR corporate spreads Chart 21: 10-year maturity EUR corporate spread

multiples

Euro Corps AAA AA A BBB

Hi 434 117 274 518 633

Lo 75 35 45 65 90

31-Mar-19 125 62 66 98 159

31-Mar-18 97 50 61 82 117

0

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read

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s)

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AA A BBB


0.9

1.1

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1.9

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2.3

A vs AA BBB vs A



27

Corporate Sharpe ratios increased the most in Q1 and with that short

Corporates increased their lead in the rankings, pulling away from next-best

Quasi-Governments. Italian sovereigns lost ground QoQ and are solidly at

the bottom of the rankings.

Table 10: Euro Five- and Ten-Year Sharpe Ratios (as of 31 Mar 2019) Ann. Total Return Ann. Std. Dev. Sharpe Ratio Chg vs Prior Qtr


3-Month Euro Deposit LEC3 -0.15% 0.34% 0.07 0.19 Euro Broad Market EMU0 3.10% 4.37% 3.09 3.37 0.30 0.34 -0.01 0.02

Euro Sovereigns EG00 3.47% 4.22% 3.95 4.20 0.27 0.27 -0.02 0.02

1-3 Yr EG01 0.34% 1.37% 0.57 1.30 0.25 0.23 -0.03 -0.02

3-5 Yr EG02 1.44% 2.76% 1.52 2.41 0.30 0.29 -0.03 -0.01

5-7 Yr EG03 2.70% 4.04% 2.59 3.59 0.32 0.30 -0.02 0.01

7-10 Yr EG04 4.46% 5.15% 4.07 4.92 0.33 0.28 -0.02 0.02

10+ Yr EG09 7.08% 7.22% 9.00 8.67 0.24 0.23 -0.01 0.03

Austria G0H0 3.43% 4.73% 3.93 4.62 0.26 0.27 0.00 0.02

Belgium G0G0 3.87% 4.86% 4.84 5.41 0.24 0.24 0.01 0.02

Finland G0K0 2.78% 3.76% 3.27 3.70 0.26 0.27 -0.01 0.01

France G0F0 3.51% 4.26% 4.21 4.56 0.25 0.25 0.00 0.02

Germany G0D0 2.95% 3.65% 3.78 4.22 0.24 0.23 0.00 0.02

Ireland G0R0 3.71% 6.54% 3.51 9.62 0.32 0.19 -0.01 0.03

Italy G0I0 3.15% 4.68% 5.91 6.87 0.17 0.19 -0.03 0.00

Luxembourg G0LU 2.61% na 2.19 3.10 0.36 na -0.03 na

Netherlands G0N0 3.31% 4.12% 3.96 4.43 0.25 0.25 -0.01 0.02

Slovakia G0SL 3.77% 5.37% 3.43 4.18 0.33 0.34 -0.01 0.02

Slovenia G0SV 5.10% na 4.25 7.08 0.35 na -0.03 na

Spain G0E0 4.49% 5.09% 4.10 6.32 0.33 0.22 -0.03 0.02

Quasi-Governments EQ00 2.50% 3.77% 2.31 2.68 0.33 0.37 0.00 0.02

1-3 Yr EQ01 0.33% 1.66% 0.34 0.88 0.40 0.43 -0.03 -0.01

3-5 Yr EQ02 1.34% 3.03% 1.04 1.90 0.41 0.41 -0.02 0.00

5-7 Yr EQ03 2.59% 4.37% 2.08 2.94 0.38 0.39 -0.01 0.01

7-10 Yr EQ04 4.20% 5.66% 3.51 4.34 0.36 0.35 -0.01 0.02

10+ Yr EQ09 6.74% 7.56% 7.58 7.88 0.27 0.27 0.00 0.04

Securitized/Collateralized EL00 2.08% 3.92% 1.65 2.43 0.39 0.42 -0.01 0.02

Corporates ER00 2.87% 5.35% 2.43 3.29 0.36 0.43 0.02 0.04

All Financials EB00 2.80% 5.66% 2.07 3.69 0.41 0.41 0.02 0.07

All Industrials EJ00 2.85% 4.99% 2.76 3.06 0.31 0.43 0.02 0.01

All Utilities EK00 3.30% 5.18% 2.79 3.38 0.35 0.41 0.01 0.01

1-3 Yr ER01 1.00% 2.90% 0.57 1.51 0.58 0.49 0.02 0.03

3-5 Yr ER02 2.16% 4.81% 1.45 2.71 0.46 0.47 0.02 0.03

5-7 Yr ER03 3.38% 6.65% 2.64 4.20 0.38 0.43 0.02 0.04

7-10 Yr ER04 4.59% 7.95% 4.08 5.72 0.33 0.38 0.01 0.05

10+ Yr ER09 5.95% 8.76% 6.53 7.06 0.27 0.34 0.01 0.03

AAA ER10 3.83% 4.57% 3.97 3.40 0.29 0.36 0.02 0.03

AA ER20 2.60% 4.20% 2.32 2.72 0.34 0.41 0.01 0.02

A ER30 2.78% 5.27% 2.27 3.38 0.37 0.42 0.02 0.06

BBB ER40 3.00% 6.59% 2.77 4.41 0.33 0.40 0.02 0.01

Note: Reverse highlighted values represent the top three performing sectors in each respective period; shaded values are the bottom three performing sectors.


28

Though the current 12-month excess return is just barely in positive territory

(+0.04%), the fact that Q1-09 moved out of the observation period meant the

10-year annualized excess return shifted up to +2.84% from 2.42% at the end

of 2018.

Chart 22: Euro Corporate Index 12-month excess return

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-15

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-5

0

5

10

15

20

Mar

-09

Sep

-09

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-10

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-17

Mar

-18

Sep

-18

Mar

-1912

- m

on

th e

xces

s re

turn

%

10yr Annualized Excess Return = +2.84%

Table 11: Euro corporate Index 12-month excess return

10yr Ann. Excess Return 2.84

Current 0.04

Hi (Mar-10) 14.87

Lo (Mar-09) -12.66

Std. Dev 4.19


29

Sterling Corporates

Sterling corporate spreads posted an impressive rally in Q1, and only a few

sectors remain above their 10-year spread averages.

Table 12: Sterling Corporate Index (UR00) spread & excess return by sector Option-Adjusted Spread (OAS) Excess return %


Sector %wgt Eff.Dur. Current QoQ YoY 10yr high 10yr low 10yr avg 3mo 1yr 3yrs 5yrs 10yrs 3yrs 5yrs 10yrs

Sterling Corp Index 100.0 8.48 160 -24 22 0.3 1.4 0.8 2.54 0.32 2.47 1.84 4.44 0.28 0.09 0.20

Automotive 3.2 3.41 134 -12 53 0.4 2.3 1.2 1.03 0.10 1.28 1.00 2.05 0.35 0.13 0.35

Banking 22.3 5.93 154 -30 20 0.2 1.5 0.7 2.56 0.77 2.57 2.23 5.61 0.30 0.12 0.18

Basic Industry 2.4 7.53 131 -17 16 0.2 1.4 0.7 2.05 1.14 5.47 2.43 5.10 0.39 0.11 0.25

Capital Goods 2.2 8.38 190 -67 61 0.4 2.4 1.2 5.75 -4.05 0.90 -0.03 2.94 0.01 -0.01 0.16

Consumer Goods 4.5 7.04 145 -13 38 0.4 1.7 1.0 1.25 -1.63 1.51 0.92 2.79 0.14 0.04 0.23

Energy 2.7 6.97 137 -24 15 0.5 1.5 0.9 1.98 1.25 1.88 0.84 2.42 0.34 0.05 0.21


Healthcare 3.0 12.20 119 -9 7 0.6 1.5 1.1 1.33 0.69 2.19 1.17 2.05 0.20 0.04 0.13

Insurance 8.8 6.34 223 -36 35 0.2 1.6 0.7 4.02 1.15 4.15 3.25 9.67 0.35 0.13 0.24

Leisure 0.4 5.25 177 -12 32 0.3 1.7 0.9 1.14 0.02 2.35 1.40 3.53 0.28 0.11 0.32

Media 1.2 8.90 179 -20 10 0.3 1.5 1.0 2.69 2.02 2.64 2.73 3.71 0.26 0.09 0.21

Real Estate 10.6 12.38 173 -13 24 0.2 1.6 0.9 1.70 -0.59 1.53 1.18 5.55 0.21 0.04 0.25

Retail 2.2 9.03 126 -17 10 0.4 1.3 0.9 1.75 0.85 2.61 1.29 2.46 0.31 0.06 0.18

Services 2.2 18.76 94 -6 12 0.2 1.5 0.7 2.29 -1.46 -0.94 0.50 2.92 0.05 0.00 0.26

Technology & Electronics 0.9 6.83 97 -18 16 n.a. n.a. n.a. 1.41 0.03 n.a. n.a. n.a. n.a. n.a. n.a.


Transportation 4.0 9.19 143 -20 33 0.5 1.7 0.9 1.99 -0.95 1.05 1.05 2.33 0.20 0.05 0.20

Utility 19.5 9.53 154 -23 12 0.6 1.3 1.0 3.19 0.94 2.84 1.94 2.68 0.26 0.08 0.16

Spreads rallied 12% overall, and that was fairly consistent across the rating

segments as well. The AA-rated spread did rally slightly more (-14%).

Chart 23: Sterling Corporate & Collateralized Index spread by rating

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Sterling Corp & Coll AAA AA A BBB


30

With the aftermath of the financial crisis still in the observation window, the

index and all rating segments remain at the extreme low end of their spread

ranges. That 10-year range will begin to compress next quarter.

Chart 24: Sterling Corporate & Collateralized Index spread range (last 10 years)

All rating sub-index spreads are well below their 10-year averages, but the A-

AA spread multiple is well above its average and continues to move higher.

Chart 25: 10 Year GBP corporate spreads Chart 26: 10 Year GBP corporate spread multiples

Sterling Corp &Coll

AAA AA A BBB

Hi 623 268 403 697 918

Lo 109 50 64 100 132

3/31/2019 157 71 83 136 199

3/31/2018 134 57 78 124 163

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31

Though 5-year Corporate Sharpe ratios got a boost in Q1, there was a

dramatic pick-up in longer 10-year ratios as Q1-09 fell out of the observation

window. While short Corporates continue to dominate the Sharpe ratio

rankings, the 10-year ratio is now higher than the 5-year.

Table 12: Sterling Five- and Ten-Year Sharpe Ratios (as of 31 Mar 2019) Ann. Total Return Ann. Std. Dev. Sharpe Ratio Chg vs Prior Qtr


3-Month Sterling Deposit LBP3 0.55% 0.68% 0.05 0.09 Sterling Broad Market UK00 5.66% 6.15% 6.45 5.80 0.23 0.27 0.01 0.04

Gilts G0L0 5.75% 5.24% 7.12 6.44 0.21 0.21 0.01 0.03

1-3 Yr G1L0 0.77% 1.22% 0.83 0.89 0.08 0.18 0.00 -0.01

3-5 Yr G2L0 2.09% 2.66% 2.18 2.30 0.20 0.25 0.00 0.00

5-7 Yr G3L0 3.11% 3.37% 3.44 3.57 0.22 0.22 -0.01 0.00

7-10 Yr G4L0 4.68% 4.65% 5.23 5.32 0.23 0.22 0.00 0.01

10+ Yr G9L0 9.00% 7.63% 11.32 10.32 0.22 0.20 0.01 0.03

Non-Gilts UN00 5.50% 7.59% 5.46 5.45 0.26 0.36 0.01 0.06

Quasi-Government UQ00 4.25% 4.48% 4.34 4.16 0.25 0.26 0.00 0.02

1-3 Yr UQ01 1.20% 1.78% 0.75 0.82 0.25 0.39 0.02 0.01

3-5 Yr UQ02 2.22% 3.04% 2.00 2.17 0.24 0.31 0.01 0.00

5-7 Yr UQ03 3.64% 4.51% 3.27 3.45 0.27 0.32 0.00 0.01

7-10 Yr UQ04 4.74% 5.53% 4.53 4.67 0.27 0.30 0.01 0.03

10+ Yr UQ09 7.87% 7.23% 8.57 8.31 0.25 0.23 0.00 0.03

AAA UQ10 3.92% 4.28% 4.02 4.02 0.24 0.26 0.00 0.02

AA UQ20 4.90% 3.91% 5.24 4.70 0.24 0.20 0.00 0.03

Corporate & Collateralized UC00 5.85% 8.76% 5.89 6.13 0.26 0.37 0.02 0.07

All Financials UF00 5.68% 10.00% 5.08 6.89 0.29 0.38 0.02 0.12

All Industrials UI00 5.65% 7.51% 6.34 6.01 0.23 0.33 0.02 0.01

All Utilities UU00 6.94% 7.86% 7.74 7.32 0.24 0.28 0.02 0.01

1-3 Yr UC01 2.33% 4.30% 0.93 1.81 0.54 0.57 0.01 0.13

3-5 Yr UC02 3.50% 6.16% 2.16 3.38 0.39 0.46 0.02 0.06

5-7 Yr UC03 4.81% 8.67% 3.37 4.95 0.36 0.45 0.01 0.15

7-10 Yr UC04 5.75% 9.80% 4.92 6.46 0.30 0.40 0.01 0.11

10+ Yr UC09 7.56% 10.20% 8.89 8.54 0.23 0.32 0.02 0.06

AAA UC10 4.98% 6.40% 5.09 5.02 0.25 0.33 0.00 0.04

AA UC20 5.89% 7.58% 5.93 5.90 0.26 0.33 0.01 0.05

A UC30 6.14% 8.78% 6.75 6.85 0.24 0.34 0.02 0.09

BBB UC40 5.68% 10.29% 5.36 6.40 0.28 0.42 0.02 0.04



32

With more of the fallout from the financial crisis dropping out of the 10-year

window the annualized sterling corporate excess return rose 1.30% in Q1.

Now at +4.44%, that impressive annualized excess return is the result of a

368bp spread tightening over the last 10 years.

Chart 27: Sterling Corporate Index 12-month excess return

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0

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30

40

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10yr Annualized Excess Return =

Table 13: Sterling corporate Index 12-month excess return


Current 0.32

Hi (Mar-10) 30.33

Lo (Mar-09) -24.21

Std. Dev 8.16


33

High Yield

Global High Yield Index (HW00)

The Global High Yield Index bounced back from a FY loss in2018 with its

best quarter in seven years.

The Global High Yield Index bounced back from a 2.41% full year loss in 2018 to gain 6.75% in the opening

quarter of 2019. That is the best quarter the index has seen in exactly seven years when it opened 2012 with a

comparable 6.94% return. The index went on to gain another 11% over the last nine months of 2012. Can it

match that level of performance over the next nine months? On one hand, the index would seem to have some

headroom going forward as its annualized return over the last 15 months is just 3.34%, or roughly half of its

annualized return since its inception at the start of 1998 (6.62%). On the other hand, the index yield to worst is

more than a percent lower than it was at the end of Q1 2012 (6.13% vs. 7.38%) and the index spread is more

than 200bp lower (421bp vs. 625bp).

All but one sector are trading more than 10% rich to the 10 year average

spread.

Not only is the index spread well below where it stood at the end of Q1 2012, but it is also 24% below its 10 year average (553bp). And that is not an anomaly caused by a few large sectors that are trading at historically cheap levels and therefore bias the overall index average lower. In fact, all sector spreads are below their 10 year averages with only one , Retail, falling within 10% of its historical average. All other sectors are more than 10% below their 10 year averages and half are more than 25% below their 10 year averages.

Exhibit A: Sector spreads as a percentage of their 10-year averages

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1


34

The CCC and lower segment bounced back from a Q4 2018 setback to top

the index in Q1 2019.

After a setback in Q4 2018, the CCC and lower segment of the Global High Yield Index bounced back with a

7.63% return that was nearly a percent better than the BB-B segment of the index (6.66%). However, that was

not attributed to a perceived improvement in the underlying credits in the lower rated index – the BB-B index

posted the higher spread tightening gain for the quarter (4.13% vs. 3.68%). But the lower rated component

generated 1.5% more in income than its higher rated peer and that was more than enough to tip the scales in

favor of the CCC and lower index.

The Global High Yield Index saw the largest departure of rising stars since

Q2 2015.

After dipping slightly below the 1.0 mark in Q4 2018, for the fourth time in the last five quarters the Global High

Yield Index upgrade/downgrade ratio was solidly positive in Q1 (1.33). The volume of downgrades slowed only

slightly from the prior quarter ($69.0bn in Q1 vs. $73.7bn in Q4 2018) while at the same time the volume of

upgrades jumped 25% versus the prior quarter ($91.8bn vs. $73.2bn). That led to a surge in the volume of

rising stars as $31.6bn in debt departed the index during the quarter for the investment grade index. That is the

highest volume of rising stars since Q2 2015.


35

Q1 was a sizable rebound for all sectors but the best performers were up

over 7%, led by Real Estate (8.23%).

Chart 28: Global High Yield Index (HW00) total return % by sector

It looked for a while in late 2018 that yields and spreads might test the five-

year highs, but Q1 sent both back toward the lows.

Chart 29: Global High Yield Index (HW00) spread and yield

8.23

7.95

7.88

7.30

7.28

7.28

7.08

6.92

6.91

6.89

6.87

6.77

6.49

6.38

4.96

4.67

4.61

4.39

-3.0

0

-4.8

8

-1.4

1

-3.3

9

-3.2

0

1.22

-2.0

4

-1.6

3

-0.3

9

-1.2

2

-4.6

2

-3.8

2 -1.6

5

-1.9

5

-0.9

2

-1.2

3

-5.9

8

-1.5

2

-8

-6

-4

-2

0

2

4

6

8

10

Quarter 2018

0.00

5.00

10.00

15.00

20.00

25.00

0

500

1000

1500

2000

2500

3/31

/199

9

3/31

/200

0

3/31

/200

1

3/31

/200

2

3/31

/200

3

3/31

/200

4

3/31

/200

5

3/31

/200

6

3/31

/200

7

3/31

/200

8

3/31

/200

9

3/31

/201

0

3/31

/201

1

3/31

/201

2

3/31

/201

3

3/31

/201

4

3/31

/201

5

3/31

/201

6

3/31

/201

7

3/31

/201

8

3/31

/201

9

OAS (RHS) Effective Yield (RHS)


36

Even in the case of the sector with the biggest spread tightening move (Real

Estate, -211bp) spreads are still mostly higher YoY. Media is the most

notable exception and ended the quarter right at its 10-year low.

Table 14: Global High Yield Index sector spreads Current spread multiple vs

Sector Current QoQ chng YoY chng 10yr high 10yr low 10yr avg

Automotive 371 -78 119 0.2 1.9 0.9

Banking 369 -48 102 0.1 1.7 0.7

Basic Industry 419 -119 100 0.3 1.6 0.8

Capital Goods 343 -131 49 0.3 1.2 0.7

Consumer Goods 460 -111 82 0.4 1.4 0.9

Energy 518 -117 111 0.3 1.5 0.8

Financial Services 401 -139 35 0.1 1.4 0.7

Healthcare 388 -114 -13 0.4 1.3 0.8

Insurance 477 -72 115 0.2 1.5 0.8

Leisure 338 -117 49 0.1 1.4 0.6

Media 339 -134 -35 0.2 1.0 0.6

Real Estate 503 -211 65 0.1 1.4 0.7

Retail 542 -120 79 0.3 1.2 0.9

Services 431 -141 51 0.3 1.3 0.7

Technology & Electronics 297 -175 0 0.1 1.3 0.5

Telecommunications 457 -106 26 0.4 1.3 0.9

Transportation 588 -75 146 0.3 1.6 0.9

Utility 374 -111 54 0.3 1.4 0.7

Global High Yield Index 421 -119 60 0.2 1.3 0.8

The 10-year Sharpe ratio for both Global and US Fallen Angels is now tied

with US BBs at the top of the rankings.

Table 15: Five- and Ten-Year Sharpe Ratios (as of 31 Mar 2019) Ann. Total Return Ann. Std. Dev. Sharpe Ratio Chg vs Prior Qtr

Index Ticker 5yr 10yr 5yr 10yr 5yr 10yr 5yr 10yr

3-Month Treasury Bill G0O1 0.74 0.43 0.23 0.19 US Treasury G0Q0 2.34 2.49 3.48 3.67 0.14 0.17 0.00 0.03

Global High Yield HW00 4.87 11.64 5.05 7.57 0.24 0.42 0.03 0.02

Original Issue High Yield HWHY 4.40 10.83 5.03 7.37 0.21 0.40 0.03 0.02

Fallen Angels HWFA 6.82 14.35 5.32 8.39 0.33 0.46 0.01 0.02

US High Yield H0A0 4.70 11.24 5.47 7.45 0.21 0.41 0.03 0.02

BB H0A1 5.13 10.05 4.65 5.88 0.27 0.46 0.03 0.01

B H0A2 4.31 10.26 5.55 7.04 0.19 0.39 0.03 0.03

C H0A3 4.63 14.97 9.79 12.82 0.13 0.32 0.02 0.03

US Original Issue HY H0HY 4.28 10.65 5.37 7.32 0.19 0.39 0.03 0.02

US Fallen Angels H0FA 7.38 14.17 6.53 8.26 0.29 0.46 0.02 0.03

US Non-Distressed H0ND 4.88 9.06 4.50 5.40 0.27 0.45 0.03 0.01

US Distressed H0DI -4.59 10.57 17.88 17.87 -0.06 0.18 0.02 0.01

US High Yield Constrained HUC0 4.70 11.21 5.46 7.42 0.21 0.41 0.03 0.02

European Currency High Yield HP00 4.32 12.99 4.16 9.13 0.25 0.39 0.01 0.01

European Currency HY Constr HPC0 4.31 13.08 4.16 9.23 0.25 0.39 0.01 0.01

Euro High Yield HE00 4.03 12.23 4.32 8.95 0.22 0.37 0.02 0.01

Euro High Yield Constrained HEC0 4.02 12.45 4.32 9.15 0.22 0.37 0.02 0.01

Sterling High Yield HL00 5.72 16.69 3.85 10.41 0.37 0.43 0.00 0.00

European Issuers High Yield HWP0 4.87 12.74 3.94 8.85 0.30 0.39 0.02 -0.01

European Issuers HY Constr HQ0C 4.85 12.72 3.95 8.86 0.30 0.39 0.02 -0.01

Global HY & EM Plus HA00 4.63 10.43 4.53 6.55 0.25 0.43 0.02 0.01

EM External Sovereigns EMGB 4.76 7.70 4.91 5.76 0.24 0.36 0.02 0.01

EM External Corporates EMCB 4.43 8.31 3.97 5.44 0.27 0.41 0.02 0.00



37

US High Yield Index (H0A0)

The Q1 gains more than compensated for the 2018 losses, and were led by

the lowest-rated segment. Interestingly, 2018’s best-performer, the Single-B

segment, was next-best in Q1-19.

Chart 30: US High Yield Index (H0A0) total return % by rating

As one of 2018’s laggards, it was not surprising to see Energy at the top of

the rankings in Q1. But Automotive was at the bottom in both 2018 and Q1.

Chart 31: US High Yield Index (H0A0) total return % by sector

6.75

6.49

6.92

7.63

-2.41

-2.29

-2.02

-4.40

-6.00 -4.00 -2.00 0.00 2.00 4.00 6.00 8.00 10.00

Global High Yield Index

BB

B

CCC & Lower

Quarter 2018

8.42

8.27

8.03

7.95

7.84

7.82

7.73

7.44

7.33

7.26

7.15

6.95

6.93

6.40

6.35

5.87

5.45

3.20

-6.3

7

-1.9

3

-1.3

3

1.53

-4.6

7

-3.2

9

0.94

-3.1

4 -0.5

4

-1.9

4

-3.6

3 -1.5

9

-1.5

4

-1.0

1

-2.5

5

1.08

-8.3

1

-0.1

2

-10-8-6-4-202468

10

Quarter 2018


38

Despite the sizable Q1 rally, most sector spreads are still higher YoY, though

only the Food & Drug Retail spread is above its 10-year average.

Table 16: US High Yield Index sector spreads Current spread multiple vs

Sector Ticker Current QoQ chng YoY chng 10yr high 10yr low 10yr avg

Aerospace H0AE 338 -167 26 0.3 1.3 0.6

Air Transportation H0AI 300 -80 15 0.1 1.3 0.5

Automotive & Auto Parts H0AU 345 -88 64 0.1 1.7 0.8

Banks & Thrifts H0BA 277 -59 43 0.1 1.5 0.6

Broadcasting H0BR 255 -117 -37 0.1 1.0 0.3

Building Materials H0BL 355 -115 82 0.1 1.7 0.7

Cable/Satellite TV H0CV 325 -151 -49 0.3 1.5 0.8

Capital Goods H0CA 428 -138 83 0.3 1.5 0.9

Chemicals H0CH 440 -94 144 0.3 1.7 0.8

Consumer Products H0CO 442 -141 48 0.3 1.3 0.8

Containers H0CT 269 -120 28 0.3 1.2 0.6

Div. Financial Services H0FI 357 -163 40 0.1 1.3 0.6

Div Media H0DM 380 -106 20 0.2 1.3 0.7

Energy H0EN 557 -136 114 0.3 1.6 0.9

Entertainment/Film H0ET 309 -113 53 0.3 1.4 0.7

Environmental H0EV 276 -159 39 0.2 1.3 0.5

Food & Drug Retail H0FR 653 -112 88 0.5 1.8 1.1

Food/Beverage/Tobacco H0FO 439 -97 98 0.3 1.7 1.0

Gaming H0AG 309 -135 38 0.1 1.5 0.5

Healthcare H0HL 400 -120 -17 0.4 1.3 0.8

Homebuilders/Real Estate H0HB 335 -116 49 0.2 1.6 0.7

Hotels H0AH 286 -103 34 0.2 1.4 0.8

Insurance H0IN 495 -55 112 0.2 1.6 0.9

Leisure H0LE 331 -70 13 0.1 1.3 0.7

Metals/Mining H0ME 430 -87 54 0.3 1.5 0.7

Paper H0PA 341 -75 64 0.2 1.4 0.6

Publishing/Printing H0PU 559 -127 104 0.1 1.3 0.7

Railroad H0RA 359 17 85 0.3 3.3 0.7

Restaurants H0RE 281 -139 -39 0.2 1.2 0.5

Services H0SE 426 -137 33 0.3 1.3 0.7

Steel H0ST 336 -156 77 0.2 1.6 0.6

Super Retail H0SR 576 -118 28 0.3 1.4 1.0

Technology H0TY 279 -184 -10 0.1 1.2 0.5

Telecom H0TC 473 -116 -19 0.4 1.4 0.9

Transportation Ex Air/Rail H0SH 823 -103 224 0.3 1.7 1.0

Utilities H0EL 263 -125 -58 0.2 1.0 0.4

US High Yield Index H0A0 405 -128 33 0.2 1.2 0.7


39

Spreads in all rating segments are back below their 10-year averages.

However, those averages will trend lower – all things equal – as the worst of

the financial crisis rolls out of the observation period.

Chart 32: US High Yield Index rating spreads

Though the CCC-B spread multiple is also well above its long-term average,

the size of the B-BB multiple is even more striking.

Chart 33: US High Yield Index rating spread multiples

0

500

1000

1500

2000

2500

3000

3500

BB B CCC BB avg B avg CCC avg

0.9

1.1

1.3

1.5

1.7

1.9

2.1

2.3

2.5

2.7

2.9

B vs BB CCC v B B vs BB avg CCC vs B avg


40

With all of the pre-financial crisis widening now out of the 10-year window,

the 10-year annualized return of the US High Yield Index is almost +9%.

Chart 34: US High Yield Index 12-month excess return

-60

-40

-20

0

20

40

60

80

Mar

-09

Sep

-09

Mar

-10

Sep

-10

Mar

-11

Sep

-11

Mar

-12

Sep

-12

Mar

-13

Sep

-13

Mar

-14

Sep

-14

Mar

-15

Sep

-15

Mar

-16

Sep

-16

Mar

-17

Sep

-17

Mar

-18

Sep

-18

Mar

-19

12-

mo

nth

exc

ess

retu

rn%


Table 16: US High Yield Excess Returns


Current 2.04

Hi (Nov-09) 61.08

Lo (Mar-09) -26.54

Std. Dev 14.08


41

European High Yield Indices

After leading the sell-off in 2018, CCCs led the rebound in Q1, but the

magnitude of the prior losses was not recouped.

Chart 35: European Currency High Yield Index (HP00) total return % by rating

Chart 36: European Currency High Yield Index (HP00) total return % by sector

5.21

4.94

5.70

6.60

-3.35

-2.65

-3.80

-11.27

-15.00 -10.00 -5.00 0.00 5.00 10.00

European Currency High Yield Index

BB

B

CCC & Lower

Quarter 2018

7.47

7.26

6.24

6.01

5.69

5.67

5.50

5.48

5.33

5.03

4.87

4.86

4.70

4.51

4.36

4.28

4.22

3.71

-6.5

9

-1.5

7

-3.0

7

-5.9

4

-7.5

4

-3.8

0

0.17

-0.7

6

-2.0

3

1.27

-3.4

6

0.33

-2.9

2

-3.3

6 -1.3

0

-2.6

8

-2.6

0

-4.2

6

-10-8-6-4-202468

10

Quarter 2018


42

Chart 37: European high yield currency spreads Chart 38: European high yield currency spread range (last 10 years)

Despite a sizable rally, most sector spreads remain significantly higher YoY.

The most extreme of these is Consumer Goods, which is also the only sector

spread above its 10-year average.

Table 17: European Currency High Yield Index (HP00) sector spreads Current spread multiple vs

Sector Current QoQ chg YoY chg 10yr high 10yr low 10yr avg

Automotive 399 -69 174 0.3 2.2 1.0

Banking 360 -89 124 0.1 1.9 0.6

Basic Industry 426 -138 137 0.2 1.8 0.9

Capital Goods 357 -130 55 0.3 1.5 0.8

Consumer Goods 589 -105 201 0.6 2.2 1.1

Energy 369 -92 37 0.3 1.6 0.8

Financial Services 537 -106 5 0.3 1.7 0.9

Healthcare 372 -122 5 0.5 1.2 0.8

Insurance 495 -74 134 0.1 1.6 0.8

Leisure 505 -76 167 0.3 1.8 0.8

Media 395 -125 -49 0.2 1.4 0.7

Real Estate 306 -84 48 0.1 1.5 0.5

Retail 566 -128 162 0.3 2.0 0.9

Services 488 -134 100 0.3 1.7 0.7

Technology & Electronics 262 -141 -30 0.1 1.2 0.5

Telecommunications 315 -79 29 0.2 1.6 0.6

Transportation 575 -100 50 0.2 1.8 1.0

Utility 274 -82 7 0.3 1.4 0.6

European Currency High Yield Index 412 -110 85 0.2 1.6 0.8

0

500

1,000

1,500

2,000

2,500

3,000M

ar-0

9

Sep

-09

Mar

-10

Sep

-10

Mar

-11

Sep

-11

Mar

-12

Sep

-12

Mar

-13

Sep

-13

Mar

-14

Sep

-14

Mar

-15

Sep

-15

Mar

-16

Sep

-16

Mar

-17

Sep

-17

Mar

-18

Sep

-18

Mar

-19

Euro HiYld Sterling HiYld

Euro HiYld Sterling HiYld

Hi 1993 2940

Lo 239 329

31-Mar-19 392 560

31-Mar-18 315 399

0

500

1000

1500

2000

2500

3000


43

Chart 39: Euro High Yield Index rating spreads Chart 40: Euro High Yield Index rating spread multiples

Chart 41: Sterling High Yield Index rating spreads Chart 42: Sterling High Yield Index rating spread

multiples

0

1000

2000

3000

4000

5000

6000

BB B CCC

BB avg B avg CCC avg

0.81.11.31.61.82.12.32.62.83.13.33.6

B vs BB CCC vs B

B vs BB avg CCC vs B avg

0

1000

2000

3000

4000

5000

6000

BB B CCC

BB avg B avg CCC avg

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

B vs BB CCC vs B

B vs BB avg CCC vs B avg


44

Even with the sizable Q1 rally the current 12-month excess return is just

+0.70%, thanks to the amount of spread widening seen in the other

9 months.

Chart 43: Euro High Yield Index 12-month excess return

2,000 basis points of spread tightening since the financial crisis has given

Sterling High Yield nearly a 14% annualized excess return over the last 10

years.

Chart 44: Sterling Yield Index 12-month excess return

-60

-40

-20

0

20

40

60

80

Mar

-09

Sep

-09

Mar

-10

Sep

-10

Mar

-11

Sep

-11

Mar

-12

Sep

-12

Mar

-13

Sep

-13

Mar

-14

Sep

-14

Mar

-15

Sep

-15

Mar

-16

Sep

-16

Mar

-17

Sep

-17

Mar

-18

Sep

-18

Mar

-19

12-

mo

nth

exc

ess

retu

rn%


-40

-20

0

20

40

60

80

100

120

Mar

-09

Sep

-09

Mar

-10

Sep

-10

Mar

-11

Sep

-11

Mar

-12

Sep

-12

Mar

-13

Sep

-13

Mar

-14

Sep

-14

Mar

-15

Sep

-15

Mar

-16

Sep

-16

Mar

-17

Sep

-17

Mar

-18

Sep

-18

Mar

-19

12-

mo

nth

exc

ess

retu

rn%


Table 17: Euro High Yield Excess Returns


Current 0.70

Hi (Mar-10) 71.63

Lo (Mar-09) -32.76

Std. Dev 16.80

Table 18: Sterling High Yield Excess Returns


Current 0.72

Hi (Mar-10) 115.74

Lo (Mar-09) -26.59

Std. Dev 25.63


45

Emerging Markets

Overview

The EM composite index bounced back from 2018’s loss with another strong

opening quarter, but the months ahead could prove difficult.

After suffering a 3.32% full year loss in 2018, a composite of the four flagship EM indices (External Sovereign, External Non-Sovereign, Local Sovereign, Local Non-Sovereign) climbed out of the hole in Q1 2019 as the index gained 3.99% in USD terms, unhedged. That is the best quarter the composite index has produced in two years. Notably, three of the index’s four best quarters came in Q1.

Q1 has been just as prone to suffering a loss as the other three quarters ‒ over the previous six years, each of the four quarters has incurred exactly two losses. But the magnitude of the Q1 losses has been relatively subdued in comparison to the 3-5% losses incurred twice each in Q2, Q3 and Q4. As a result, only Q1 has a positive average return (2.41%), while the others have all landed in the red, on average, with Q4 down the most (-0.91%). 2017 is the only year that the index did not run up against one or more of those large Q2-4 losses. So while the year has gotten off to a good start, there is no guarantee that the year will end on a positive note.

Exhibit A: Composite EM index total return in USD terms, unhedged

2019 2018 2017 2016 2015 2014 2013 Average

Q1 3.99 1.18 4.57 6.75 (1.17) 1.88 (0.18) 2.43

Q2

(5.45) 2.75 2.43 0.41 4.29 (4.91) (0.08)

Q3

0.32 2.79 2.79 (5.53) (3.12) 1.35 (0.24)

Q4

0.74 1.11 (4.83) 0.76 (3.59) 0.34 (0.91) Full Year

(3.32) 11.66 6.97 (5.54) (0.77) (3.47)

Local sovereigns lagged other segments of the EM market by a wide margin

but still turned in an impressive 3% return in Q1.

The local sovereign index lagged the other three components of the composite EM index by a wide margin in

Q1. Though local sovereigns had a very good quarter, gaining nearly 3%, they did not quite match up to the

three other indices, each of which hovered right around the 5% mark for the quarter. Over 97% of constituent

countries in the two external indices were in the black for the quarter. The rate of winners drops significantly in

for the local credit index but was still overwhelmingly positive (89%). But for the local sovereign index, a quarter

of the constituent countries landed in the red (in USD terms). To top it off, one of those, Turkey, tumbled more

than 9% in Q1. And to make matters worse, Turkey holds a sizable 2.5% share of the local sovereign index.

By comparison the single TRY constituent in the local credit index (YKBNK) “only” lost 4.30%, and it holds an

insignificant 0.3% share of that index.

It is understandable that two different credits could have different performances, particularly when one is a


46

sovereign and the other a non-sovereign, but how about the performance differential between local (-9.27%

USD terms) and external sovereigns (-0.82% USD terms)? A good portion of that gap is the 5.62% currency

loss incurred in the local index and the remainder is largely attributed to the return boost that the external

Turkey bonds got from the Treasury rally. If you strip that out, the excess return of the external Turkey bonds

(-2.68%) is relatively close to the return of the local Turkey bonds in local terms (-3.65%). Other factors, such

as duration differentials (6.10 years for external bonds vs. 2.17 years for local bonds), account for the remainder

of the variance.

Exhibit B: EM index return attributions – QTD Exhibit C: EM index return attributions –2018

BBBs did well in Q1, but do not look as good over the long haul.

The BBB rating category had a strong showing in Q1, with returns in the external indices that lagged the high

yield segments by only about half a percent, and that led higher and lower rated segments in the local indices.

But over time BBBs have generally not done as well as higher and lower rated credits on a risk-adjusted basis.

We analyzed Sharpe ratios based on USD monthly total returns for all four EM indices segmented into three

rating buckets ‒ AAA to A, BBB and BB and lower. The local non-sovereign index incepted in 2013 so we

compiled ratios for all four indices from that date forward. We then compiled the other three indices from 2011,

which is the start date of the local sovereign index. And finally we looked at the last 10 years for the two

external indices. The results show that for all measurement periods it is the lowest rated bucket that has the

highest Sharpe ratios for the external and local sovereign indices. Conversely, the highest rated bucket did

best for the external and local non-sovereign indices. In many cases, the BBB category came out at or near the

bottom of the rankings, but never on top.

0.0

1.0

2.0

3.0

4.0

5.0

6.0

Ext EM Sov(EMGB)

Ext EM Corp(EMCB)

Local EM Sov-USD (WALD)

Local EM Corp-USD (LOCL)

DM Govt return EM Govt return Credit return FX return

(10.0)

(8.0)

(6.0)

(4.0)

(2.0)

0.0

2.0

4.0

6.0

Ext EM Sov(EMGB)

Ext EM Corp(EMCB)

Local EM Sov-USD (WALD)

Local EM Corp-USD (LOCL)

DM Govt return EM Govt return Credit return FX return


47

Exhibit D: Emerging Markets Sharpe ratios based on monthly returns in USD terms

External Sovereign

Local Sovereign

External Non-Sovereign

Local Non-Sovereign

AAA-A BBB BB & lower




Since 2013 0.89 1.00 1.28

0.13 -0.01 0.83

1.72 1.38 1.35

0.24 -0.13 0.11 Since 2011 0.87 0.96 1.34

0.25 0.05 0.57

1.62 1.27 1.31

Last 10 years 0.85 0.93 1.15

1.55 1.21 1.23

The external non-sovereign 12-month upgrade/downgrade ratio reached its

highest level since October 2012.

For a second straight quarter, the rating agencies did not look favorably on external non-sovereign debt. In Q1

2019, downgrades outweighed upgrades by a 4:3 margin ‒ a 0.75 3 month upgrade/downgrade ratio that is

slightly below the 0.81 reading in Q4 2018. But despite the recent setback, the 12-month upgrade/downgrade

ratio has been on the rise, ending Q1 2019 at 1.36 ‒ its highest reading since October 2012.

With significantly shorter duration the local currency sovereign and non-

sovereign indices offer a robust yield pick-up vs external sovereigns

(+0.76% and +1.81%, respectively).

Chart 45: Emerging Markets comparative yields by segment

0

2

4

6

8

10

12

14

Mar

-09

Aug

-09

Jan-

10

Jun-

10

Nov

-10

Apr

-11

Sep

-11

Feb

-12

Jul-1

2

Dec

-12

May

-13

Oct

-13

Mar

-14

Aug

-14

Jan-

15

Jun-

15

Nov

-15

Apr

-16

Sep

-16

Feb

-17

Jul-1

7

Dec

-17

May

-18

Oct

-18

Ext Sov (EMGB) Ext Non-Sov (EMCB)

Local Sov (WALD) Local Non-Sov (LOCL)


48

Asian Corporates now stand alone at the top of the 5-year Sharpe ratio

rankings, but have fallen just outside the top-three over the 10-year horizon.

However, over the last 10 years the AAA-A Corporate segment has the best

Sharpe ratio, and that is heavily weighted with Asian names.

Table 19: Five- and Ten-Year Sharpe Ratios (as of 31 Mar 2019) Ann. Total Return Ann. Std. Dev. Sharpe Ratio Chg vs Prior Qtr

Index Ticker 5yr 10yr 5yr 10yr 5yr 10yr 5yr 10yr

3-Month Treasury Bill G0O1 0.74 0.43 0.23 0.19 US Treasury G0Q0 2.34 2.49 3.48 3.67 0.14 0.17 0.00 0.03

External DM+EM Sov BBB & Lower IP00 4.91 8.16 5.48 6.37 0.22 0.35 0.02 0.01

BB & Lower IG00 5.03 9.71 6.99 7.76 0.18 0.34 0.02 0.00

BBB-B IQ00 4.83 8.02 5.43 6.33 0.22 0.34 0.02 0.01

USD DM+EM External Sov BBB & Lower IGOV 4.94 8.23 5.73 6.64 0.21 0.34 0.02 0.01

BBB I5GV 4.51 6.89 5.60 6.37 0.20 0.29 0.02 0.02

BB I1GV 7.39 10.15 5.55 6.39 0.34 0.43 -0.01 0.00

B I2GV 3.36 10.02 8.23 10.38 0.10 0.27 0.03 -0.01

CCC & Lower I3GV 6.81 14.18 18.11 17.11 0.12 0.24 0.02 -0.02

BB-B I4GV 5.07 9.37 6.63 7.54 0.19 0.34 0.02 0.00

BB & Lower IGD0 4.98 9.52 7.13 7.82 0.18 0.33 0.02 0.00

BBB-B IQD0 4.89 8.11 5.67 6.59 0.21 0.33 0.02 0.01

EM External Sovereigns EMGB 4.76 7.70 4.91 5.76 0.24 0.36 0.02 0.01

EM External Corporates EM Corp+ EMCB 4.43 8.31 3.97 5.44 0.27 0.41 0.02 0.00

EM Liquid Corp+ EMCL 4.75 8.40 4.23 5.65 0.27 0.40 0.02 0.01

AAA-A EM1R 3.80 6.08 2.69 3.47 0.33 0.46 0.01 -0.01

BBB EM2R 4.13 8.01 4.54 5.86 0.22 0.37 0.03 0.01

BB & Lower EMHY 5.75 11.83 6.94 9.53 0.21 0.34 0.02 0.01

BB EM3R 6.20 11.26 5.52 8.31 0.28 0.37 0.02 0.03

B & Lower EM4R 5.07 12.30 10.06 11.94 0.14 0.29 0.02 -0.01

BBB-BB EMXO 5.04 9.17 4.72 6.56 0.26 0.38 0.02 0.02

Financial EMFL 4.48 8.79 3.19 5.57 0.34 0.42 0.00 0.09

Non-Financial EMNF 4.60 8.65 4.93 6.95 0.23 0.34 0.03 0.00

Public Sector EMPU 4.95 8.02 4.37 5.21 0.28 0.41 0.02 0.00

Private Sector EMPV 4.57 9.04 4.21 6.59 0.26 0.37 0.02 0.02

Latin America EMLL 4.83 9.02 7.17 7.59 0.17 0.32 0.01 0.01

EMEA EMEL 4.91 9.24 4.54 6.25 0.26 0.40 0.03 0.04

Asia EMAL 4.46 7.28 2.93 4.64 0.36 0.42 0.02 0.00

Global HY & EM HA00 4.63 10.43 4.53 6.55 0.25 0.43 0.02 0.01

Global High Yield HW00 4.87 11.64 5.05 7.57 0.24 0.42 0.03 0.02



49

Emerging Markets External Sovereign

Q1’s impressive return saw contributions on all fronts: spread change

(2.38%), yield curve (1.88%) and income (1.30%).

Chart 46: External EM Sovereign Index (EMGB) quarterly return attribution

Following Q1’s rebound the index spread is now right at its 5-year average

(284bp vs 286bp). At 4.79%, the yield is 15bp above its 5-year average.

Chart 47: External EM Sovereign Index (EMGB) yield/spread

1.33%

-0.03%

1.89%

-0.01%

2.38%

5.55%

3.18%

-1.00%

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

Coupon Amort/ Roll Curve Shift CurveReshape

SpreadChange

TotalReturn

ExcessReturn

2

3

4

5

6

7

8

9

0

100

200

300

400

500

600

OAS (LHS) Effective Yield (RHS)


50

Despite the Q1 rally, the index 12-month excess return is still in negative

territory (-0.97%). Over the last 10 years the annualized excess return is a

healthy +4.64%, helped by a 266 spread decline over that period.

Chart 48: External EM Sovereign Index (EMGB) 12-month excess return

Table 20: External EM Sovereign Index (EMGB) quarterly returns; current stats

Country Total Return Excess Return Effective Yield OAS % weight Albania 3.89 3.02 2.31 276 0.09 Angola 13.75 11.18 7.74 529 0.55 Argentina 6.29 4.06 10.23 852 4.95 Armenia 4.99 3.56 4.80 248 0.11 Azerbaijan 5.72 3.09 4.40 204 0.25 Bahamas 4.72 2.26 5.29 293 0.14 Bahrain 6.17 4.08 5.51 313 1.48 Belarus 6.14 3.95 6.09 376 0.21 Belize 6.20 3.25 10.89 834 0.03 Benin 0.00 0.00 5.80 622 0.06 Bolivia 7.91 5.92 5.20 291 0.20 Brazil 4.92 2.30 4.46 212 3.43 Bulgaria 2.75 1.19 0.60 93 0.83 Cameroon 6.85 5.06 8.03 573 0.08 Chile 5.50 2.84 2.10 84 1.30 China 3.79 1.32 2.86 50 0.51 Colombia 7.77 4.77 4.00 165 2.94 Costa Rica 11.42 8.71 6.76 425 0.41 Croatia 5.16 3.62 2.09 120 1.41 Czech Republic 0.14 0.20 (0.05) 55 0.66 Dominican Republic 6.84 4.31 5.37 293 1.48 Ecuador 15.20 13.42 8.00 569 1.74 Egypt 10.26 7.89 6.72 454 2.60 El Salvador 8.19 5.62 6.90 449 0.57 Ethiopia 8.07 6.15 6.28 398 0.10 Gabon 8.71 6.94 7.55 527 0.21 Georgia 2.20 1.21 4.06 179 0.05 Ghana 10.56 8.25 7.97 554 0.67 Guatemala 4.23 1.89 4.89 254 0.30 Honduras 6.14 4.47 4.85 254 0.18 Hong Kong 3.21 1.46 2.97 60 0.20 Hungary 3.77 1.92 2.91 104 1.35 Indonesia 5.88 3.40 3.68 161 6.91 Iraq 8.46 6.88 6.69 440 0.36 Israel 3.72 1.28 2.17 98 1.56

-20

-10

0

10

20

30

40

50

12 month excess return 10 year annualized excess return


51

Table 20: External EM Sovereign Index (EMGB) quarterly returns; current stats

Country Total Return Excess Return Effective Yield OAS % weight Ivory Coast 10.27 7.88 6.40 488 0.72 Jamaica 5.65 2.74 5.65 318 0.60 Jordan 9.22 6.53 6.54 409 0.30 Kazakhstan 5.48 2.68 3.55 146 0.85 Kenya 14.35 11.97 6.94 454 0.41 Kuwait 3.09 1.04 3.02 72 0.81 Lebanon 3.37 1.32 10.58 823 2.15 Macedonia 4.49 4.01 1.73 225 0.18 Malaysia 4.00 1.35 3.22 79 0.39 Mexico 6.61 3.64 3.68 184 6.29 Mongolia 6.97 5.53 5.31 306 0.31 Montenegro 3.01 2.39 2.92 332 0.06 Morocco 2.66 1.36 2.39 150 0.48 Namibia 6.36 4.63 5.59 330 0.12 Nigeria 14.43 11.69 7.14 469 1.13 Oman 7.08 4.73 6.31 392 1.83 Pakistan 8.10 6.25 6.52 422 0.54 Panama 6.92 3.82 3.74 126 1.43 Papua N.Guinea 9.22 6.70 7.20 482 0.06 Paraguay 7.82 4.68 4.59 207 0.42 Peru 7.05 3.88 3.13 112 1.47 Philippines 5.89 2.84 3.36 92 2.89 Poland 1.90 0.56 0.92 69 5.06 Qatar 3.37 0.62 3.79 131 4.33 Romania 3.52 1.29 2.58 208 2.67 Russia 5.08 2.52 4.19 207 4.20 Rwanda 5.35 3.84 5.87 363 0.04 Saudi Arabia 5.73 2.85 3.91 145 6.02 Senegal 10.38 7.91 6.02 432 0.40 Serbia 2.17 1.05 3.63 138 0.22 South Africa 5.53 3.00 5.13 279 1.60 South Korea 4.13 1.63 2.35 56 0.61 Sri Lanka 8.87 7.08 6.44 413 1.32 Suriname 4.30 2.21 9.60 726 0.06 Trinidad & Tobago 6.34 4.37 4.44 211 0.18 Tunisia 3.62 2.71 7.34 696 0.28 Turkey (0.55) (2.68) 6.83 484 6.28 UAE 3.70 1.37 3.38 100 2.14 Ukraine 10.91 9.01 8.65 632 1.56 Uruguay 8.12 4.70 4.20 164 1.34 Vietnam 3.48 1.60 3.88 158 0.11 Zambia 1.03 (0.67) 15.97 1,368 0.22

Total 5.55 3.18 4.79 284 100.00


52

Emerging Markets External Non-Sovereign

The robust 2.50% spread change contribution was the biggest performance

driver in Q1, but the yield curve chipped in over 1% as well.

Chart 49: External EM Corporate Plus Index (EMCB) quarterly return attribution

As the LatAm and High Yield segments were the laggards in 2018 they

showed the biggest rebounds in Q1.

Chart 50: External EM Non-Sovereign Index returns

1.25%

0.08%

1.21%

-0.04%

2.50%

5.01%

3.28%

-1.00%

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

Coupon Amort/ Roll Curve Shift CurveReshape

SpreadChange

TotalReturn

ExcessReturn

-4 -2 0 2 4 6 8

Private Sector

Public Sector

High Yield

Inv Grade

Asia

EMEA

LatAm

Ext EM Non-Sov

2018 3 month total return


53

A year ago the index spread was near a 5-year low before the late 2018

widening move. After Q1’s rally the spread is now back well below the

5 year average (268bp vs 319bp).

Chart 51: External EM Corporate Plus Index (EMCB) yield/spread

The last 12 months delivered a +0.95% excess return, which is modest

compared to the +5.88% 10-year annualized excess return. However, the

10-year result includes the 783bp spread rally off the financial crisis spread

highs.

Chart 52: External EM Corporate Plus (EMCB) 12-month excess return

2

202

402

602

802

1002

1202

0

2

4

6

8

10

12

14

Effective Yield (RHS) OAS (LHS)

-30

-20

-10

0

10

20

30

40

50

60

12 month excess return 10 year annualized excess return


54

Table 21: External EM Corporate Plus Index (EMCB) quarterly returns; current stats

Country Total Return Excess Return Effective Yield OAS % weight Argentina 5.08 3.53 10.97 898 1.81 Azerbaijan 4.46 2.32 5.00 268 0.34 Bahrain 6.47 4.76 5.68 336 0.30 Barbados 5.76 4.04 5.89 360 0.09 Belarus 4.58 3.37 7.79 555 0.02 Brazil 5.20 3.28 5.26 301 8.68 Bulgaria 2.39 2.02 2.30 282 0.08 Cambodia 4.65 3.86 4.90 263 0.02 Chile 5.94 3.58 4.37 202 2.93 China 4.79 3.27 4.53 240 28.51 Colombia 6.98 5.00 4.74 240 1.59 Congo, Demc Rep. 5.57 4.73 6.43 420 0.04 Costa Rica 8.06 6.29 6.98 464 0.14 Croatia 4.09 2.70 3.84 160 0.04 Czech Republic 2.86 2.12 1.93 225 0.79 Dominican Republic 6.54 4.74 6.24 393 0.07 Ecuador 6.08 5.29 9.05 665 0.05 El Salvador 5.44 4.21 6.05 375 0.07 Georgia 4.97 3.57 5.98 373 0.10 Ghana 7.21 6.00 6.14 386 0.10 Guatemala 4.79 3.36 4.76 248 0.17 Hong Kong 4.75 2.99 3.60 162 4.41 Hungary 1.56 1.01 1.79 123 0.14 India 5.63 3.90 4.33 213 3.96 Indonesia 9.10 6.66 4.90 254 2.64 Israel 5.03 3.30 4.66 311 1.85 Jamaica (17.06) (18.20) 22.84 2,057 0.24 Jordan 1.79 1.02 4.25 184 0.03 Kazakhstan 6.83 4.19 5.76 332 0.92 Kuwait 4.07 2.49 4.11 177 0.48 Macau 4.44 2.26 4.46 214 0.42 Malaysia 4.23 2.27 3.62 127 1.04 Mauritius 4.24 3.15 7.09 486 0.05 Mexico 6.83 4.74 5.20 329 9.53 Mongolia 4.75 3.55 5.93 361 0.07 Morocco 4.61 2.23 4.96 258 0.20 Nigeria 5.24 4.12 7.39 515 0.20 Oman 5.91 3.91 6.21 391 0.32 Panama 6.30 3.96 4.57 222 0.36 Paraguay 2.93 2.07 4.90 266 0.02 Peru 6.86 4.53 4.62 220 1.88 Philippines 3.84 2.18 3.57 130 0.38 Poland 2.44 1.36 1.31 142 0.60 Qatar 3.07 1.55 4.06 170 1.32 Romania 6.94 6.48 2.60 311 0.20 Russia 3.67 2.38 4.55 263 4.62 Saudi Arabia 4.92 2.68 4.05 191 0.76 Singapore 4.24 2.39 3.86 179 1.83 South Africa 5.95 4.43 4.94 295 1.60 South Korea 2.86 1.34 2.96 83 5.19 Taiwan 2.69 0.76 3.58 127 0.20 Thailand 4.04 1.89 3.72 134 0.89 Trinidad & Tobago 6.03 3.22 5.64 323 0.07 Turkey 1.67 0.35 8.98 673 2.26 UAE 4.06 2.27 4.09 204 4.53 Ukraine 8.55 7.08 8.42 611 0.45 Uruguay 3.88 2.67 10.24 801 0.02 Zambia 13.15 11.73 7.64 536 0.34

Total 5.01 3.28 4.77 268 100.00


55

Emerging Markets Local Sovereign

After hitting a new high just over 6% in Q4, the local currency index yield

rallied back to 5.55% by the end of Q1, which is still high relative to the

5.08% average over the nine-year history of the index.

Chart 53: Diversified Local EM Sovereign Index (WALD) yield

Chart 54: Local Diversified EM Sovereign Index (WALD) 3-month returns by country

3.5

4

4.5

5

5.5

6

6.5

-20

-15

-10

-5

0

5

10

15

-20

-15

-10

-5

0

5

10

15

Total Return % QTD LOC FX Return Total Return % QTD USD UnHedged


56

Table 22: Diversified Local EM Sovereign Index (WALD) quarterly returns; current stats

Table 23: Diversified Local EM IL Sovereign Index (WILD) quarterly returns; current stats

Country

Local total

return% FX

return%

USD total

return% Effective

Yield %

weight

Country

Local total

return% FX

return%

USD total

return% Effective

Yield %

weight Argentina (4.11) (12.70) (16.81) 31.16 0.35

Argentina 13.83 (15.08) (1.24) 10.41 3.82

Brazil 2.50 (0.42) 2.08 7.34 10.00

Brazil 5.62 (0.43) 5.19 2.61 20.00 Chile 2.88 2.04 4.92 3.83 0.81

Chile 5.21 2.09 7.30 1.28 9.67

Colombia 3.31 2.01 5.32 5.78 3.44

Colombia 1.22 1.97 3.19 2.79 9.41 Czech Republic 0.77 (2.15) (1.38) 1.88 2.95

Israel 3.37 3.06 6.42 (0.31) 12.30

Egypt 9.44 3.73 13.17 16.61 2.06

Mexico 2.10 1.56 3.66 4.64 20.00 Hong Kong 1.64 (0.27) 1.38 1.48 0.64

South Africa 1.70 (0.26) 1.44 3.30 10.47

Hungary 2.28 (2.08) 0.20 1.44 2.49

South Korea 1.18 (1.72) (0.54) 0.41 1.71 Indonesia 4.49 1.03 5.52 7.53 5.74

Thailand (1.10) 2.57 1.48 1.79 1.95

Israel 2.38 3.03 5.41 1.26 2.53

Turkey 0.24 (5.85) (5.61) 4.29 10.66

Malaysia 2.78 1.26 4.04 3.74 9.54

Total 3.22 (0.21) 3.01 3.04 100.00 Mexico 5.20 1.61 6.81 8.09 8.10

Pakistan 2.78 (1.43) 1.35 11.80 0.79 Peru 4.40 1.84 6.24 5.25 1.78 Philippines 10.41 0.16 10.57 5.75 4.26 Poland 0.69 (2.03) (1.34) 2.05 6.37 Romania 1.83 (4.41) (2.58) 3.89 1.56 Russia 3.31 5.78 9.09 7.90 4.18 Singapore 0.03 0.63 0.66 2.07 4.68 South Africa 3.54 (0.26) 3.28 9.04 5.58 South Korea 1.25 (1.72) (0.47) 1.84 10.00 Thailand 1.26 2.63 3.90 2.51 7.67 Turkey (3.65) (5.62) (9.27) 21.80 2.51 Vietnam 2.10 (0.04) 2.06 4.20 1.97 Total 2.72 0.23 2.94 5.55 100.00


57

Emerging Markets Local Non Sovereign

Local currency credit did not stumble in 2018 as did its hard currency

counterpart, but last year’s laggard, LatAm, did post the best performance in

Q1-19.

Chart 55: Local EM Non Sovereign Index returns

0 1 2 3 4 5 6 7 8

Local EM Non-Sov diverse

Local EM Non-Sov broad

LatAm

EMEA

Asia

Public Sector

Private Sector

3 month total return (Local) 2018


58

After turning higher later in 2018, both the yield and spread are moving back

toward the near-term lows.

Chart 56: Diversified Local EM Non-Sovereign Index (LOCL) yield/spread

The 12-month excess return of +0.55% is modest for the index’s 144bp

spread. The 5-year annualized excess return of +1.19% is also low

compared to the 229bp average spread over that period.

Chart 57: Diversified Local EM Non-Sovereign Index (LOCL) 12 month excess return

5

6

7

8

9

10

11

12

13

14

100

200

300

400

500

600

700

OAS (LHS) Effective Yield (RHS)

-3

-2

-1

0

1

2

3

4

Mar

-14

Jun-

14

Sep

-14

Dec

-14

Mar

-15

Jun-

15

Sep

-15

Dec

-15

Mar

-16

Jun-

16

Sep

-16

Dec

-16

Mar

-17

Jun-

17

Sep

-17

Dec

-17

Mar

-18

Jun-

18

Sep

-18

Dec

-18

Mar

-19


59

Table 24: Diversified Local EM Non-Sovereign Index (LOCL) quarterly returns; current stats

Currency Total

Return Excess Return

Effective Yield OAS % weight

Brazilian Real 5.69 1.88 9.25 61 2.00 Chinese Renminbi (offshore) 3.04 0.78 5.30 244 5.63 Chinese Renminbi (inshore) 1.08 (0.51) 3.48 52 4.37 Colombian Peso 3.83 0.76 7.35 185 10.00 Czech Koruna 0.55 0.23 2.68 90 1.94 Hong Kong Dollar 3.63 1.57 3.16 167 10.00 Indian Rupee 3.63 0.78 8.29 159.00 10.00 Indonesia Rupiah* 4.42 1.31 10.05 341 2.48 Malaysian Ringgit 1.44 (0.39) 4.48 70 7.77 Mexican Peso 7.49 1.67 10.32 218 10.00 Peru Nuevo sol 1.52 (0.14) 5.07 156 3.52 Russian Ruble 3.03 0.72 8.63 89 9.99 Singapore Dollar 1.26 1.12 3.06 100 10.00 South African Rand 3.93 0.68 9.38 117 10.00 Turkish Lira 1.63 0.48 28.52 580 0.30 Thailand Baht 0.42 0.01 1.78 3 2.00

Total 3.27 0.77 6.60 144 100.00


60

Return Attributions

Table 25: Quarterly return attributions Index Coupon Amort/ Roll Curve Shift Curve Reshape Spread Change MBS Principal

Paydown Volatility Change

Total Return Excess Return

GBMI 0.64% -0.09% 1.65% -0.04% 0.46% -0.01% 0.06% 2.68% 0.68%

W0G1 0.50% -0.12% 1.77% -0.02% 0.05% 0.00% 0.00% 2.17% 0.11%

G0BQ 0.61% -0.12% 1.73% -0.08% 0.52% 0.00% 0.00% 2.68% 0.70%

G0BL 0.82% -0.01% 1.18% -0.02% -0.12% -0.05% 0.38% 2.20% 0.45%

G0BC 0.88% -0.03% 1.67% -0.08% 1.97% 0.00% 0.00% 4.41% 2.37%

US00 0.82% 0.02% 1.50% -0.02% 0.55% -0.01% 0.12% 2.99% 0.83%

B0A0 0.79% 0.02% 1.64% -0.04% 0.85% 0.00% 0.00% 3.26% 1.00%

G0Q0 0.63% 0.04% 1.59% -0.06% -0.01% 0.00% 0.00% 2.18% -0.03%

G0P0 0.78% -0.10% 1.00% 0.02% 0.12% 0.00% 0.00% 1.83% 0.18%

C0A0 1.04% 0.01% 1.78% -0.01% 2.19% 0.00% 0.00% 5.01% 2.58%

C0A1 0.85% 0.04% 2.66% -0.12% 1.53% 0.00% 0.00% 4.98% 1.75%

C0A2 0.84% 0.02% 1.65% -0.06% 1.28% 0.00% 0.00% 3.73% 1.49%

C0A3 0.95% 0.01% 1.77% -0.01% 1.86% 0.00% 0.00% 4.59% 2.17%

C0A4 1.14% 0.01% 1.79% 0.01% 2.63% 0.00% 0.00% 5.58% 3.13%

M0A0 0.90% 0.02% 1.18% 0.03% -0.32% -0.06% 0.51% 2.27% 0.36%

R0A0 0.71% 0.02% 0.50% 0.03% 0.04% 0.01% 0.00% 1.30% 0.24%

CMBS 0.91% -0.01% 1.25% 0.09% 0.74% 0.00% 0.00% 2.98% 1.00%

PE00 0.55% -0.23% 2.02% -0.13% 0.50% 0.00% 0.00% 2.72% 0.76%

EMU0 0.51% -0.22% 1.89% -0.18% 0.52% 0.00% 0.00% 2.52% 0.81%

EG00 0.57% -0.29% 2.15% -0.09% 0.19% 0.00% 0.00% 2.54% 0.45%

EQ00 0.36% -0.17% 1.85% -0.20% 0.23% 0.00% 0.00% 2.08% 0.43%

EP00 0.16% 0.01% 1.39% -0.35% 0.12% 0.00% 0.00% 1.33% 0.32%

ER00 0.50% -0.10% 1.41% -0.33% 1.66% 0.00% 0.00% 3.15% 2.10%

ER10 0.42% -0.11% 2.16% 0.08% 1.40% 0.00% 0.00% 3.95% 1.70%

ER20 0.41% -0.18% 1.40% -0.31% 0.95% 0.00% 0.00% 2.26% 1.22%

ER30 0.44% -0.12% 1.45% -0.31% 1.34% 0.00% 0.00% 2.81% 1.71%

ER40 0.56% -0.06% 1.37% -0.34% 2.08% 0.00% 0.00% 3.61% 2.61%

EMUL 0.51% -0.22% 1.89% -0.18% 0.52% 0.00% 0.00% 2.52% 0.80%

UK00 0.75% -0.25% 2.68% 0.12% 0.47% 0.00% 0.00% 3.77% 0.61%

G0L0 0.68% -0.28% 3.00% 0.17% 0.03% 0.00% 0.00% 3.59% 0.04%

UQ00 0.61% -0.15% 1.59% -0.08% 0.41% 0.00% 0.00% 2.38% 0.53%

UC00 1.00% -0.19% 2.04% 0.03% 1.81% 0.00% 0.00% 4.69% 2.32%

UC10 0.84% -0.29% 1.93% -0.06% 0.85% 0.00% 0.00% 3.26% 1.12%

UC20 0.76% -0.15% 2.08% 0.01% 1.14% 0.00% 0.00% 3.84% 1.40%

UC30 0.94% -0.17% 2.34% 0.07% 1.79% 0.00% 0.00% 4.97% 2.22%

UC40 1.13% -0.21% 1.83% 0.02% 2.09% 0.00% 0.01% 4.87% 2.75%

G0M0 0.48% -0.36% 2.83% 0.09% 0.01% 0.00% 0.00% 3.05% 0.06%

G0W0 0.59% -0.43% 1.91% -0.27% 0.02% 0.00% 0.00% 1.83% 0.05%

G0S0 0.44% -0.40% 1.97% 0.07% -0.04% 0.00% 0.00% 2.04% -0.02%

HA00 1.48% 0.07% 1.25% -0.04% 3.55% 0.00% 0.01% 6.33% 4.62%

HW00 1.59% 0.13% 0.95% -0.03% 4.09% 0.00% 0.01% 6.75% 5.33%

H0A0 1.70% 0.12% 0.93% 0.08% 4.55% 0.00% 0.02% 7.40% 5.77%

HP00 1.14% 0.05% 1.01% -0.41% 3.41% 0.00% 0.02% 5.21% 4.62%

HE00 1.08% 0.03% 1.02% -0.44% 3.57% 0.00% 0.02% 5.28% 4.75%

HL00 1.52% 0.14% 0.94% -0.20% 2.28% 0.00% 0.03% 4.71% 3.70%

HWP0 1.35% 0.11% 0.97% -0.26% 3.27% 0.00% 0.01% 5.46% 4.51%

HC00 1.41% 0.02% 1.23% 0.14% 2.03% 0.00% 0.00% 4.83% 2.97%

HWC0 1.68% 0.06% 0.90% 0.07% 4.65% 0.00% 0.01% 7.37% 5.78%

WSOV 0.60% -0.19% 1.67% -0.03% 0.14% 0.00% 0.00% 2.20% 0.10%

IP00 1.46% -0.01% 1.88% 0.01% 2.71% 0.00% 0.00% 6.06% 3.65%

IGOV 1.56% -0.01% 1.89% 0.03% 2.95% 0.00% 0.00% 6.42% 3.89%

WSAV 0.50% -0.12% 1.77% -0.02% 0.05% 0.00% 0.00% 2.18% 0.12%

WSBV 1.18% -0.54% 1.06% -0.04% 0.61% 0.00% 0.00% 2.28% 0.02%

LOCL 1.61% 0.13% 0.92% 0.15% 0.45% 0.00% 0.00% 3.27% 0.77%

EMGB 1.33% -0.03% 1.89% -0.01% 2.38% 0.00% 0.00% 5.55% 3.18%

EMCB 1.25% 0.08% 1.21% -0.04% 2.50% 0.00% 0.00% 5.01% 3.28%

EMCL 1.34% 0.08% 1.26% 0.01% 2.53% 0.00% 0.00% 5.22% 3.33%


61

Chart 58: US Treasury par coupon spline curve Chart 61: 3-month change in US Treasury curve

Chart 59: German par coupon spline curve

Chart 62: 3-month change in German curve

Chart 60: UK Gilt par coupon spline curve

Chart 63: 3-month change in UK Gilt curve

Chart 64: JGB par coupon spline curve Chart 66: 3-month change in JGB curve

1.50

2.00

2.50

3.00

3.50

2 4 6 8 10 12 14 16 18 20 22 24 26 28 30

% Y

ield

Years to Maturity

US 12/31/18 US 3/31/19

-0.35

-0.30

-0.25

-0.20

-0.15

2 4 6 8 10 12 14 16 18 20 22 24 26 28 30

Ch

ang

e (b

ps)

Years to Maturity

3-month Change Avg Shift = -25 bps 2yr-30yr Spread = +1 bps

-1.00

-0.50

0.00

0.50

1.00

1.50

2 4 6 8 10 12 14 16 18 20 22 24 26 28 30

% Y

ield

Years to Maturity

German 12/31/18 German 3/31/19

-0.40

-0.30

-0.20

-0.10

0.00

0.10

2 4 6 8 10 12 14 16 18 20 22 24 26 28 30C

han

ge

(bp

s)

Years to Maturity

3-month Change Avg Shift = -28 bps 2yr-30yr Spread = -32 bps

0.50

0.75

1.00

1.25

1.50

1.75

2.00

2.25

2 4 6 8 10 12 14 16 18 20 22 24 26 28 30

% Y

ield

Years to Maturity

UK 12/31/18 UK 3/31/19

-0.30

-0.25

-0.20

-0.15

-0.10

-0.05

2 4 6 8 10 12 14 16 18 20 22 24 26 28 30

Ch

ang

e (b

ps)

Years to Maturity



62

Chart 65: Canada par coupon spline curve

Chart 67: 3-month change in Canada curve

-0.50

-0.25

0.00

0.25

0.50

0.75

1.00

2 4 6 8 10 12 14 16 18 20 22 24 26 28 30

% Y

ield

Years to Maturity

Japan 12/31/18 Japan 3/31/19

-0.25

-0.20

-0.15

-0.10

-0.05

0.00

2 4 6 8 10 12 14 16 18 20 22 24 26 28 30

Ch

ang

e (b

ps)

Years to Maturity


1.00

1.50

2.00

2.50

3.00

2 4 6 8 10 12 14 16 18 20 22 24 26 28 30

% Y

ield

Years to Maturity

Canada 12/31/18 Canada 3/31/19

-0.40

-0.37

-0.34

-0.31

-0.28

-0.25

2 4 6 8 10 12 14 16 18 20 22 24 26 28 30

Ch

ang

e (b

ps)

Years to Maturity

3-month Change Avg Shift = -30 bps 2yr-30yr Spread = +1 bps


63

Correlation Table 26: Last 5 year correlation of monthly total return, local currency terms

Index Ticker GBMI W0G1 G0BQ G0BL G0BC GBC1 GBC2 GBC3 GBC4 HW00 EMGB EMCB

Broad IG GBMI 1.00 0.98 0.98 0.91 0.86 0.94 0.96 0.92 0.76 0.11 0.56 0.39

Global govt W0G1

1.00 0.95 0.85 0.74 0.88 0.89 0.82 0.61 -0.05 0.43 0.24

Quasi-govt G0BQ

1.00 0.89 0.84 0.90 0.93 0.90 0.74 0.13 0.54 0.40

Securitized/Collat G0BL

1.00 0.79 0.86 0.87 0.84 0.69 0.11 0.53 0.41

Corporate G0BC

1.00 0.90 0.95 0.99 0.98 0.52 0.76 0.66

AAA Corp GBC1

1.00 0.96 0.95 0.81 0.16 0.58 0.39

AA Corp GBC2

1.00 0.99 0.87 0.27 0.62 0.48

A Corp GBC3

1.00 0.93 0.38 0.68 0.56

BBB Corp GBC4

1.00 0.66 0.81 0.77

High Yield HW00

1.00 0.71 0.85

EXD EM sov EMGB

1.00 0.90

EXD EM corp EMCB

1.00

Table 27: Last 10 year correlation of monthly total return, local currency terms Index Ticker GBMI W0G1 G0BQ G0BL G0BC GBC1 GBC2 GBC3 GBC4 HW00 EMGB EMCB

Broad IG GBMI 1.00 0.95 0.98 0.90 0.79 0.92 0.92 0.80 0.67 0.14 0.52 0.37

Global govt W0G1

1.00 0.94 0.78 0.58 0.87 0.78 0.60 0.43 -0.12 0.32 0.11

Quasi-govt G0BQ

1.00 0.87 0.74 0.90 0.88 0.75 0.61 0.09 0.50 0.34

Securitized/Collat G0BL

1.00 0.76 0.82 0.83 0.77 0.67 0.23 0.55 0.46

Corporate G0BC

1.00 0.75 0.95 0.99 0.98 0.64 0.74 0.77

AAA Corp GBC1

1.00 0.88 0.75 0.61 0.09 0.47 0.30

AA Corp GBC2

1.00 0.95 0.86 0.41 0.63 0.59

A Corp GBC3

1.00 0.96 0.62 0.70 0.74

BBB Corp GBC4

1.00 0.76 0.77 0.86

High Yield HW00

1.00 0.71 0.88

EXD EM sov EMGB

1.00 0.88

EXD EM corp EMCB

1.00


64

Appendix Table 30: Return Attribution Methodology

Return Factor Description Calculation Methodology

Coupon The return attributed to that portion of the nominal coupon earned or received during the period.

Coupons received during the period plus the change in accrued interest divided by the starting price plus accrued interest (also equal to total return minus price return).

MBS Principal Paydown

3

The return of a mortgage security attributed to the receipt of scheduled and unscheduled principal payments at par.

Paydown return equals par minus the starting price divided by the starting price plus accrued interest times the percentage of outstanding principal repaid during the period.

Amortization/ Roll

The portion of price return attributed to the passage of time. This includes the amortization of premium bonds and the accretion of discount bonds along with the effect on the present value of a bond’s cash flows as they “roll down the yield curve”.

Calculate the Option-Adjusted Spread1 (OAS) of the bond at the

beginning of the measurement period. Next change settlement to the end of period date, and using the beginning yield curve, OAS and implied volatility solve for price. The difference between the “Amortization/Roll” price and the beginning price divided by beginning price plus accrued interest is Amortization/Roll return. (Note: for mortgage securities, the prepayment model is used to generate a new set of projected cash flows for the new settlement date, but based on the old yield curve, OAS and volatility assumptions.)

Curve Shift

The impact on a bond’s price resulting from general changes in the level of interest rates defined as the average parallel shift in the yield curve

2.

Price is recalculated using the beginning OAS and implied volatility along with the starting yield curve plus the parallel shift amount. The parallel shift amount is equal to the average change in the 29 points on the par coupon spline curve (from 2 to 30 years). The difference between the “Curve Shift” price and the “Amortization/Roll” price divided by beginning price plus accrued interest is Curve Shift return. (Note: for mortgage securities, the prepayment model is used to generate a new set of projected cash flows based on the old OAS and volatility assumptions and the starting yield curve plus parallel shift amount.)

Curve Reshape

The impact on a bond’s price resulting from changes in the shape of the yield curve

2.

Price is recalculated using the beginning OAS and implied volatility along with the ending yield curve. The difference between the “Curve Reshape” price and the “Curve Shift” price divided by beginning price plus accrued interest is Curve Reshape return. (Note: for mortgage securities, the prepayment model is used to generate a new set of projected cash flows based on the old OAS and volatility assumptions and the ending yield curve.)

Volatility Change

The impact on the price of a security resulting from changes in implied volatility.

Price is recalculated using the beginning OAS along with the ending yield curve and implied volatility. The difference between the “Volatility Change” price and the “Curve Reshape” price divided by beginning price plus accrued interest is Volatility Change return. (Note: For U.S. Mortgages, the prepayment model is used to generate a new set of projected cash flows based on the old OAS, the ending yield curve and new volatility assumptions.)

Spread Change

The change in price resulting from changes in spread.

The difference between the actual ending price and the “Volatility Change” price divided by beginning price plus accrued interest is Spread Change return.

Total Return

The sum of all of the above return factors. (Note: Since the above factors do not take currency into account, the sum of these factors is equal to the local currency return.)

Ending Price plus accrued interest minus beginning price plus accrued interest divided by beginning price plus accrued interest.

1 Option-adjusted Spread is the number of basis points that the Government curve must be shifted in order to equate a bond’s

discounted cash flows with its market price. 2 The French-German curve was used as the baseline government yield curve for purposes of attributing returns for all of the Euro

Indices until June 2013. Starting in July 2013 the German curve is used as the benchmark curve for the Eurozone. 3 MBS Principal Paydown applies only to U.S. Mortgage Backed Securities.


65

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