The start of 2016 has been a rocky road for all risk markets. This week’s chart depicts how much of the move between the end of 2015 and the market’s recent bottom, which occurred on February 11, 2016, has been retraced. The S&P 500 and Dow Jones Industrial Average indices have, over the past four weeks, retraced 90% and 88% of the move over the first six weeks of the year, while corporate spreads have not only recouped their losses but have now tightened on a year-to-date basis. Meanwhile, commercial mortgage backed securities (CMBS) cash markets have remained largely unchanged.
Why have corporate spreads snapped tighter over the past month while CMBS spreads have been slow to follow? The announcement by the European Central Bank (ECB) last week to expand its Asset Purchase Program to include European non-financial corporate bonds provided a further positive technical indicator for the credit risk markets, causing corporate spreads to tighten further. However, ongoing liquidity and regulatory concerns in the structured products market, particulary CMBS, has led to material underperformance of the asset class.
In my view, the recent dislocation provides an opportunity to gain commercial real estate exposure at historically wide spread levels. Commercial real estate fundamentals remain favorable across most major property types. Moreover, loan performance has benefited from positive net operating income growth, low interest rates, limited construction and rising/steady property values over the past year.
Key Takeaway: Global macro volatility helped drive risk markets wider in early 2016, creating opportunities for investors. While we have seen several weeks of improving conditions in the credit markets, technical headwinds have caused the CMBS market to lag. My preference is towards higher quality deals rated A- or better, which trade at levels well wide of corporates and are adequately protected from losses.
The material provided here is for informational use only. The views expressed are those of the author, and do not necessarily reflect the views of Penn Mutual Asset Management.
This material is for informational use only. The views expressed are those of the author, and do not necessarily reflect the views of Penn Mutual Asset Management. This material is not intended to be relied upon as a forecast, research or investment advice, and it is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy.
Opinions and statements of financial market trends that are based on current market conditions constitute judgment of the author and are subject to change without notice. The information and opinions contained in this material are derived from sources deemed to be reliable but should not be assumed to be accurate or complete. Statements that reflect projections or expectations of future financial or economic performance of the markets may be considered forward-looking statements. Actual results may differ significantly. Any forecasts contained in this material are based on various estimates and assumptions, and there can be no assurance that such estimates or assumptions will prove accurate.
Investing involves risk, including possible loss of principal. Past performance is no guarantee of future results. All information referenced in preparation of this material has been obtained from sources believed to be reliable, but accuracy and completeness are not guaranteed. There is no representation or warranty as to the accuracy of the information and Penn Mutual Asset Management shall have no liability for decisions based upon such information.
High-Yield bonds are subject to greater fluctuations in value and risk of loss of income and principal. Investing in higher yielding, lower rated corporate bonds have a greater risk of price fluctuations and loss of principal and income than U.S. Treasury bonds and bills. Government securities offer a higher degree of safety and are guaranteed as to the timely payment of principal and interest if held to maturity.
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