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Rieger Report: High Yield Domination

Commodities Post Best September in Six Years

Rieger Report: Insured Munis Begin to Show Value

Rieger Report: Sector Driven Corporate Bond Returns

A long time coming: Real estate moves out from under the shadow of financials - Part 1

Rieger Report: High Yield Domination

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J.R. Rieger

Former Head of Fixed Income Indices

S&P Dow Jones Indices

High yield bonds have been marching along and putting up returns that are dominating the investment grade bond markets.

U.S. junk bonds continue to have no stink to them as demand for yield far outweighs the supply and seemingly the credit risks associated with these bonds.   The bonds of larger entities tracked in the S&P 500 High Yield Corporate Bond Index have returned 15.57% year-to-date modestly out performing the broader S&P U.S. High Yield Corporate Bond Index.  The S&P 500 High Yield Corporate Bond Index tracks the junk bonds of issuers of the S&P 500 and as the yields indicate, on average, they tend to be better quality than the bonds in the broader index.

Floating rate senior loans, as tracked by the S&P/LSTA U.S. Leveraged Loan 100 Index have returned over 8.5% year-to-date and are yielding just 110bps lower than fixed rate high yield bonds. Demand for yield combined with the benefits of floating rate interest payments and better security provisions than fixed rate junk bonds all helps to draw attention to this asset class.

High yield municipal bonds have also been in demand and also have benefited from a rally in Puerto Rico bonds. The S&P Municipal Bond High Yield Index, which includes Puerto Rico bonds has returned just about 9.5% year-to-date.  Without Puerto Rico bonds the index would have returned 8.19% year-to-date.

Table 1) Select indices, their year-to-date returns, yields and total market value as of September 30th, 2016:

Source: S&P Dow Jones Indices, LLC. Data as of September 30th, 2016. Table is provided for illustrative purposes. It is not possible to invest directly in an index. Past performance is no guarantee of future results.
Source: S&P Dow Jones Indices, LLC. Data as of September 30th, 2016. Table is provided for illustrative purposes. It is not possible to invest directly in an index. Past performance is no guarantee of future results.

The posts on this blog are opinions, not advice. Please read our Disclaimers.

Commodities Post Best September in Six Years

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Jodie Gunzberg

Former Managing Director, Head of U.S. Equities

S&P Dow Jones Indices

The S&P GSCI Total Return gained 4.1% in Sep., cutting the loss in the 3rd quarter to 4.2% and bring its year-to-date performance to 5.3%.  19 of 24 commodities were positive in Sep., from just 8 in Jul., the most to turn from negative to positive in two months since Jul. 2012. Energy gained 6.1%, making it the best performing sector and livestock performed worst of the sectors, losing 12.1%. The winning single commodity in Sep. was unleaded gasoline, gaining 11.4% and lean hogs lost 22.1%, the most of any commodity.

While the overall month was positive, the index was filled with extremes. Lean hogs and feeder cattle are having their 2nd worst months in history, the worst since Dec. 2003 and Aug. 2002, respectively.  This drove livestock to return its 7th worst month ever since Dec. 2003 when it lost 15.8%.  On the other hand, sugar and lead each posted 11.3% gains this month.

Adjusting for seasonality by looking only at historical months of Sep., while feeder cattle and lean hogs had their worst Sep. yet, it was the 3rd best ever for lead, 4th best for nickel and 5th best for aluminum, brent crude, gasoil, Kansas wheat and unleaded gasoline. It was also a strong Sep. in history for two sectors, agriculture posted its 6th best Sep. and industrial metals posted its 8th best Sep. Overall the S&P GSCI gained its first positive and best total return in Sep. since 2010, when it gained 8.5%.

Commodities are on pace to have several big winners and losers this year.  Thus far gold and zinc are set to have their 3rd best years in history while feeder cattle is set to post its worst year.  Below is a table of commodities that are closest to be on pace for record setting years. Although natural gas is having one of its best years, it is still negative – it has only ever been positive six times through the year at this point.

Source: S&P Dow Jones Indices
Source: S&P Dow Jones Indices

The S&P GSCI loses 74 basis points on average historically in the 4th quarter that is has been the worst performing quarter and is the only quarter that loses on average.  Energy is known to have its worst quarter at the end of the year but some commodities in industrial metals and agriculture perform at their best in the last quarter.  Since energy holds more weight and tends to drag other commodities down with it, only time (and fundamentals) will tell if commodities will end positive for the first year since 2012.

Source: S&P Dow Jones Indices
Source: S&P Dow Jones Indices

 

 

The posts on this blog are opinions, not advice. Please read our Disclaimers.

Rieger Report: Insured Munis Begin to Show Value

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J.R. Rieger

Former Head of Fixed Income Indices

S&P Dow Jones Indices

The S&P Municipal Bond Index has recorded a 4.21% year-to-date total return for the first three quarters of 2016 lagging the taxable corporate bond market returns of nearly 9% as tracked by the S&P 500 Bond Index.  Some segments of the municipal bond market are contributing more than others:

Table 1) Select municipal bond indices, their year-to-date returns and yields as of September 30th 2016

Source: S&P Dow Jones Indices, LLC.  Data as of September 30th, 2016. Table is provided for illustrative purposes. It is not possible to invest directly in an index. Past performance is no guarantee of future results.
Source: S&P Dow Jones Indices, LLC. Data as of September 30th, 2016. Table is provided for illustrative purposes. It is not possible to invest directly in an index. Past performance is no guarantee of future results.

The posts on this blog are opinions, not advice. Please read our Disclaimers.

Rieger Report: Sector Driven Corporate Bond Returns

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J.R. Rieger

Former Head of Fixed Income Indices

S&P Dow Jones Indices

Sector selection seems to be a major component of bond market returns in 2016.  On a total return basis the bonds of companies in the S&P 500 Index have been outperforming the stocks of those companies in 2016. A closer look reveals that as the yield starved market pushed yields down the higher yielding sectors of the bond markets have been what is driving the performance of the bond market.

Through the first three quarters of 2016, the S&P 500 Bond Index has seen a total return of over 8.9% year-to-date while the S&P 500 Index has returned over 7.8%.  The higher yielding sectors of Energy, Materials, Telecommunications and Utilities combine for a weight of 24% of the index and each sector has seen robust performance in  2016 so far,  The two leading sectors are the S&P 500 Energy Corporate Bond Index  returning over 16% year-to-date and the S&P 500 Materials Corporate Bond Index returning over 14%.

The drag on the corporate bond market is coming from the largest sector in the S&P 500 Bond Index, the Financials sector.  The S&P 500 Financials Corporate Bond Index, representing 25% of the index by market value has returned just over 6.25% year-to-date.

Table 1) Select indices, their returns and yields as of September 30th 2016:

*S&P 500 Real Estate Corporate Bond Index launched September 1st 2016. Source: S&P Dow Jones Indices, LLC.  Data as of September 30th, 2016. Table is provided for illustrative purposes. It is not possible to invest directly in an index. Past performance is no guarantee of future results.
*S&P 500 Real Estate Corporate Bond Index launched September 1st 2016. Source: S&P Dow Jones Indices, LLC. Data as of September 30th, 2016. Table is provided for illustrative purposes. It is not possible to invest directly in an index. Past performance is no guarantee of future results.

The posts on this blog are opinions, not advice. Please read our Disclaimers.

A long time coming: Real estate moves out from under the shadow of financials - Part 1

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Nick Kalivas

Senior Equity Product Strategist

Invesco

Real estate’s new sector status uncovers key differences between REITs and financial stocks

As of Sept. 1, S&P and MSCI have established real estate as the 11th sector within the Global Industry Classification Standard (GICS) by separating it from the financials sector. Under this arrangement, real estate investment trusts (REITs) are now classified as follows:

  1. Mortgage REITs are a sub-industry of the financials sector.
  2. All other REITs are classified as equity REITs and are classified as an industry under the real estate sector.

This move is expected to increase investor focus on the new real estate sector, which has offered unique return characteristics. As an example, REITs typically pay an above-market dividend yield. As of Aug. 31, 2016, the S&P 500 Real Estate Investment Trusts REITS Industry Index offered a dividend yield of 3.91%, compared with 2.13% for the S&P 500 Index.1

Financial stocks and REITs tend to behave differently

Separating real estate from financials make sense when you consider how they relate to each other. The following correlation matrix illustrates the relationship between different segments of the financials  sector relative to REITs, the VIX Index (a near-term indicator of market volatility), the 10-year Treasury yield, the S&P 500 Index, and the utility sector over a roughly eight-year period.

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Judging from these correlations, there are key differences between financial shares and real estate investment trusts.

  • Diversified financial stocks (S&P 500 Diversified Financials Industry Group Index) and insurance stocks (S&P 500 Insurance Select Industry Index) displayed the highest correlations to the 10-year Treasury yield; both like rising rates. By contrast, equity REITs (S&P 500 Real Estate Investment Trusts REITs Industry Index) displayed significantly lower correlation to the 10-year Treasury yield, while mortgage REITs (Dow Jones U.S. Mortgage REITs Index) displayed limited correlation to the 10-year Treasury yield.
  • Insurance stocks were most negatively correlated to market volatility, as represented by VIX, while mortgage REITs and equity REITs displayed the least negative correlation to VIX. This suggests that REITs could have a relatively defensive tilt compared with stocks in the financials sector. Typically, VIX rises during periods of uncertainty and weak equity prices.
  • Equity REITs had lower correlation to the S&P 500 Index than broader financials, such as banks, insurance companies and diversified financials. Mortgage REITs displayed the lowest correlation to the S&P 500 Index.
  • Banks (S&P 500 Banks Index) and diversified financials displayed a strong positive correlation to each other. In fact, they look related, from my viewpoint.
  • The relationship between equity REITs and utility stocks (S&P 500 Utilities Sector Index) is stronger than the relationship between REITs and other segments of the financials sector, such as banks, diversified financials, and insurance companies.

Clearly, there are significant differences between REITs and other segments of the financials sector, which may help explain some of the logic behind separating real estate from financials.

Stay tuned for part 2 of this series.

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Important information
Correlation is the degree to which two investments have historically moved in relation to each other.
Dividend yield is the amount of dividends paid over the past year divided by a company’s share price.
Price ratio compares the price of one security (or basket or securities) to another security (or basket of securities). In this case, the prices of two indexes are compared.
A real estate investment trust (REIT) is a closed-end investment company that owns income-producing real estate.
Relative performance refers to the performance of an asset or investment relative to another asset, investment or benchmark.
The consumer price index (CPI) measures change in consumer prices as determined by the US Bureau of Labor Statistics.
The CBOE Volatility Index® (VIX®) is a key measure of market expectations of near-term volatility conveyed by S&P 500 stock index option prices. VIX is the ticker symbol for the Chicago Board Options
Exchange (CBOE) Volatility Index, which shows the market’s expectation of 30-day volatility.
The Dow Jones U.S. Mortgage REITs Index comprises real estate investment trusts, corporations or listed property trusts that are directly involved in lending money to real estate owners.
The S&P 500 Real Estate Investment Trusts REITS Industry Index defines and measures the investable universe of publicly traded real estate investment trusts domiciled in the United States.
The S&P 500 Utilities Sector Index is an unmanaged index considered representative of the utilities market.
The S&P 500 Financials Index comprises those companies included in the S&P 500 that are classified as members of the GICS® financials sector.
The S&P Banks Index comprises stocks in the S&P Total Market Index that are classified in the GICS asset management & custody banks, diversified banks, regional banks, other diversified financial services and thrifts & mortgage finance sub-industries.
The S&P Insurance Select Industry Index comprises stocks in the S&P Total Market Index that are classified in the GICS insurance brokers, life & health insurance, multi-line insurance, property and casualty insurance and reinsurance sub-industries.
The S&P 500® Index is an unmanaged index considered representative of the US stock market.
The S&P 500 Diversified Financials Industry Group Index is a capitalization-weighted index that is considered representative of the diversified financials industry group.
An investor cannot invest directly in an index.
Past performance is no guarantee of future results.
There are risks involved with investing in ETFs, including possible loss of money. Shares are not actively managed and are subject to risks similar to those of stocks, including those regarding short selling and margin maintenance requirements. Ordinary brokerage commissions apply. The Fund’s return may not match the return of the Underlying Index. The Fund is subject to certain other risks. Please see the current prospectus for more information regarding the risk associated with an investment in the Fund.
Investments focused in a particular industry or sector are subject to greater risk and are more greatly impacted by market volatility, than more diversified investments.
Investments in real estate related instruments may be affected by economic, legal, or environmental factors that affect property values, rents or occupancies of real estate. Real estate companies, including REITs or similar structures, tend to be small and mid-cap companies and their shares may be more volatile and less liquid.
Treasury securities are backed by the full faith and credit of the US government as to the timely payment of principal and interest.
Shares are not individually redeemable and owners of the Shares may acquire those Shares from the Fund and tender those Shares for redemption to the Fund in Creation Unit aggregations only, typically consisting of 50,000, 75,000, 100,000 or 200,000 Shares.
The information provided is for educational purposes only and does not constitute a recommendation of the suitability of any investment strategy for a particular investor. Invesco does not provide tax advice. The tax information contained herein is general and is not exhaustive by nature. Federal and state tax laws are complex and constantly changing. Investors should always consult their own legal or tax professional for information concerning their individual situation. The opinions expressed are those of the authors, are based on current market conditions and are subject to change without notice. These opinions may differ from those of other Invesco investment professionals.
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All data provided by Invesco unless otherwise noted.
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The posts on this blog are opinions, not advice. Please read our Disclaimers.