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U.S.

BOND STRATEGY

WEEKLY REPORT
Buy The Back-Up In Junk Spreads
March 14, 2017
Periodical Monetary Policy: The Fed will lift rates this week, but will likely leave its median forecast
for three hikes this year unchanged. With inflation still below target the Fed has an incen-
In this Issue:
FF Fed Will Take
tive to take it easy. Curve steepeners, TIPS breakeven wideners and overweight spread
It Slow.......................2 product positions will benefit.
FF Consolidation
Complete?.................4 Duration: The growth outlook is improving and the 10-year Treasury yield could soon move
FF The Value Is Back higher, breaking out of its recent trading range. An already elevated economic surprise
In High-Yield.............5
index should not be a deterrent.

High-Yield: Junk spreads have widened even though default rate indicators continue to
show improvement. With valuations now looking more attractive, we upgrade high-yield
from neutral to overweight.

I n early November, just prior to the CHART 1

U.S. election, money markets were How Much Hawkishness Can Markets Take?
% %
FED FUNDS RATE MARKET EXPECTATIONS*:
still only discounting one rate hike YEAR-END 2017
before the end of 2017. The Fed has 2.0 2.0
already raised rates once since then
and the market is now almost priced 1.5 1.5
for another three hikes before year-end
(Chart 1). Encouragingly, financial 1.0 1.0
markets digested the shift up to two
2017 rate hikes without much of a .5 .5
Editorial Board BPs 2/10 NOMINAL TREASURY SLOPE (LS) %
hiccup the yield curve steepened, 10-YEAR TIPS BREAKEVEN INFLATION (RS)
Ryan Swift 2.2
Vice President TIPS breakevens widened and junk 180

Robert Robis spreads tightened but the journey 2.0


Senior from two to three hikes has not gone
Vice President 140 1.8
down quite as easily (Chart 1, bottom
Mark McClellan
Senior panel). The yield curve has now started 1.6
Vice President to flatten, breakevens have leveled off 100
Alex Wang 1.4
and junk spreads have edged wider. BCA Research 2017
Research Analyst
Jeremie Peloso
The worry is that a further shift in ex-
JAN APR JUL OCT JAN APR JUL OCT JAN APR
Research Assistant pectations from three to four hikes in 2015 2016
2017 might cause markets to choke. *AS DISCOUNTED IN OVERNIGHT INDEX SWAP CURVE, DASHED HORIZONTAL
LINES DENOTE LEVELS CONSISTENT WITH 2 AND 3 RATE HIKES IN 2017
NOTE: SHADING DENOTES MOST RECENT PERIOD OF MARKET PRICING MORE
THAN 2 RATE HIKES IN 2017

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BCA RESEARCH INC. U.S. BOND STRATEGY - WEEKLY REPORT MARCH 14, 2017

Discover Fed Will Take It Slow


what you Markets are already priced for a rate hike at this weeks FOMC meeting along with no change to
can do the Feds median forecast for three hikes in 2017. As such, we would not expect much of a market
with BCA reaction if that outcome is delivered. If the Fed were to increase its median forecast from three to
four hikes in 2017, then we would anticipate at least some tightening of financial conditions. In
Analytics.
other words, we would expect the yield curve to flatten, TIPS breakevens to narrow, the dollar to
strengthen and credit spreads to widen.

As we have written several times,1 with core inflation and TIPS breakevens still below target, the
Fed must ensure that the economic recovery continues. It will therefore be quick to back away from
any nascent hawkishness if financial conditions start to tighten. With markets already showing some
signs of stress, we expect the Fed to err on the side of caution this week. This means the Fed will
lift rates, but also leave the median forecast of three 2017 rate hikes unchanged.

This notion that the Fed should be lifting rates, but only very slowly, is confirmed by our Fed Monitor
(Chart 2). The Fed Monitor is a composite of 32 indicators that track the evolution of U.S. economic
CHART 2
BCA Fed Monitor Suggests A Slow Pace Of Rate Hikes
%
FED FUNDS RATE*: 12-MONTH CHANGE (LS) 4
BCA FED MONITOR** (RS)
5
2

0 0

-5
Barely -2
above
zero -4

BCA FED MONITOR** TIGHTER MONEY


2 REQUIRED 2

0 0

-2 -2
EASIER MONEY
REQUIRED

-4 -4
% %
FED FUNDS RATE*
15 15

10 10

5 5

0 BCA Research 2017 0

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015
* TARGET FED FUNDS RATE JOINED WITH EFFECTIVE FED FUNDS RATE FOR PERIOD PRIOR TO 1971
**COMPOSITE INDICATOR CONSISTING OF ECONOMIC AND FINANCIAL MARKET VARIABLES
NOTE: SHADING DENOTES PERIODS WHEN THE FED MONITOR IS ABOVE ZERO

1
Please see U.S. Bond Strategy Weekly Report, Inflation: More Fire Than Ice, But Dont Sound The Alarm, dated January 24,
2017, available at usbs.bcaresearch.com

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BCA RESEARCH INC. U.S. BOND STRATEGY - WEEKLY REPORT MARCH 14, 2017

Financial growth, inflation pressures and financial market CHART 3

conditions. Historically, a positive reading from BCA Fed Monitor Components


conditions
the monitor has coincided with rate hikes, and BCA FED MONITOR* COMPONENTS:
are ECONOMIC GROWTH INDICATOR
vice versa. TIGHTER MONEY
consistent 1 REQUIRED 1

with The Fed Monitor just recently moved above zero, 0 0


modest Fed suggesting that only modestly tighter monetary
policy is required. As an aside, we view the -1 -1
tightening,
but have strongly positive readings from the Fed Monitor -2 -2
in 2011 and 2012 as anomalous and an artifact EASIER MONEY
ticked down -3 REQUIRED -3
of the zero-lower-bound on interest rates. Since
in recent interest rates could not be lowered as much as
weeks. would have been necessary (according to the
INFLATION INDICATOR

Fed Monitor) in 2009, they also could not be 1 TIGHTER MONEY 1


REQUIRED
raised as quickly as the monitor suggested in
2011. With the base effects from the financial
0 0
crisis now out of the data, the Fed Monitor
should go back to providing a useful signal about
the future course of monetary policy.
-1 EASIER MONEY -1
REQUIRED
We gain further insight from splitting the Fed
Monitor into its three key components: growth,
FINANCIAL CONDITIONS INDICATOR
inflation and financial conditions (Chart 3). The
growth component has accelerated strongly into 2
TIGHTER MONEY
REQUIRED
2
positive territory but the inflation component still
suggests that an easy policy stance is required.
Financial conditions are also consistent with 0 0

modest Fed tightening but have ticked down in


recent weeks as the market has discounted a
-2 -2
more rapid pace of hikes. Judging from the prior EASIER MONEY
REQUIRED
two cycles, an acceleration of the inflation com- BCA Research 2017

ponent will be necessary for the Fed to deliver on 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016
its current expected path of rate hikes. While the *COMPOSITE INDICATOR CONSISTING OF ECONOMIC AND FINANCIAL
MARKET VARIABLES
Fed has sometimes started to lift rates with the NOTE: SHADING DENOTES FED TIGHTENING CYCLES

inflation component below zero, that component


has always surged into positive territory soon after hikes began (Chart 3, panel 2).

While economic growth is accelerating, below-target inflation means that the Fed must continue to nurture
the economic recovery. Investors should position for a steeper curve, wider TIPS breakevens and tighter
credit spreads until inflationary pressures are more pronounced. This means at least until long-maturity
TIPS breakevens reach the 2.4% to 2.5% range and core PCE inflation is firmly anchored around 2%.

Bottom Line: The Fed will lift rates this week, but will likely leave its median forecast for three
hikes this year unchanged. With inflation still below target the Fed has an incentive to take it easy.
Curve steepeners, TIPS breakeven wideners and overweight spread product positions will benefit.

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BCA RESEARCH INC. U.S. BOND STRATEGY - WEEKLY REPORT MARCH 14, 2017

Discover Consolidation Complete? CHART 4


10-Year Yield Facing Resistance
what you The 10-year Treasury yield has been stuck in a % %
10-YEAR TREASURY YIELD
can do tight range below 2.6% since mid-December
3.0 3.0
with BCA (Chart 4), but recent trends in the economic
Analytics. data suggest that it could be on the verge of 2.5 2.5
breaking through this key resistance level.
2.0 2.0

Economic surprises are positively correlated with 1.5 1.5


changes in the 10-year Treasury yield and cur- BPs 10-YEAR TREASURY YIELD*:
rently appear extended (Chart 4, bottom panel). 12-WEEK CHANGE (LS)
ECONOMIC SURPRISE INDEX** (RS)
While not a mean-reverting series by construc- 100 100

tion, economic surprises tend to follow a mean


reverting pattern because investors revise their 50 50
expectations higher as the economic data out-
perform. Eventually, expectations are bound to
become excessive and the series will mean revert. 0 0

However, we have found that economic surpris-


-50 -50
es are usually first reflected in Treasury yields. BCA Research 2017

In fact, changes in the 10-year Treasury yield 2012 2013 2014 2015 2016
tend to lead the economic surprise index by * ADVANCED BY 5 WEEKS
**SOURCE: CITIGROUP
several weeks. This means that stagnant yields
during the past few months have already fore-
CHART 5
shadowed a reversal in the surprise index. In
Labor Market Points To Stronger Growth
other words, some mean reversion in economic Ann% Ann%
NON-FARM EMPLOYMENT*:
surprises is already in the price and should not Chg Chg
12-MONTH RATE OF CHANGE
prevent yields from rising in the coming weeks. 2.5 3-MONTH RATE OF CHANGE 2.5
(Annualized)

More important is that economic growth should 2.0 2.0

be sustainably above trend on a 6-12 month ho-


1.5 1.5
rizon. This will continue to put upward pressure
on inflation and ensure that the Fed remains
1.0 1.0
in a rate hike cycle. Judging from recent data,
not only is growth sustainably above trend, but Ann% Ann%
Chg REAL GDP QUARTERLY GROWTH (Annualized) Chg
it is probably even accelerating. AGGREGATE HOURS WORKED:
6 3-MONTH RATE OF CHANGE (Annualized) 6
Last weeks February employment report
showed that nonfarm payrolls rose by 235k, 4 4

the second consecutive month of gains above


2 2
200k. The rate of change of employment growth
is now threatening to reverse the downtrend 0 0
that started in early 2015, and aggregate hours BCA Research 2017

worked have accelerated suggesting that GDP 2011 2012 2013 2014 2015 2016 2017
growth will be strong in Q1 (Chart 5). *REVISIONS LINED UP TO RELEASE DATE

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BCA RESEARCH INC. U.S. BOND STRATEGY - WEEKLY REPORT MARCH 14, 2017

An already CHART 6
So Do Financial Conditions
elevated %
REAL GDP GROWTH (LS)
economic BCA FED MONITOR*: FINANCIAL CONDITIONS COMPONENT** (RS)
surprise 8
index will
not stop 2

yields from
rising. 4

-2

-4 BCA Research 2017

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015
* COMPOSITE INDICATOR CONSISTING OF ECONOMIC AND FINANCIAL MARKET VARIABLES
**SHOWN AS A 12-MONTH CHANGE

Financial conditions are also supportive of a further acceleration in growth. We found that the financial
conditions component of our Fed Monitor provides a strong indication of near-term trends in GDP
growth (Chart 6). This highlights that growth should be strong during the next few months but also
that the Fed must respond to any tightening in financial conditions if it wants growth to remain robust.

Bottom Line: The growth outlook is improving and the 10-year Treasury yield could soon move
higher, breaking out of its recent trading range. An already elevated economic surprise index should
not be a deterrent.

The Value Is Back In High-Yield


One of our key themes for 2017 is that the uptrend in the high-yield default rate is due for a pause.2
With the first quarter of the year nearly complete, all the indicators that make up our Default Rate
Model are showing noticeable improvement (Chart 7).

FF Interest coverage remains elevated

FF A strong Manufacturing PMI points to a rebound in after-tax cash flow

FF Lending standards have rolled over and are now just barely in net tightening territory

2
Please see U.S. Bond Strategy Special Report, Seven Fixed Income Themes For 2017, dated December 20, 2016, available at
usbs.bcaresearch.com

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BCA RESEARCH INC. U.S. BOND STRATEGY - WEEKLY REPORT MARCH 14, 2017

Discover CHART 7
Default Rate Indicators Are Showing Improvement
what you % %
HIGH-YIELD 12-MONTH TRAILING DEFAULT RATE*
can do 12 BCA MODEL** 12
with BCA 8 8
Analytics.
4 4

x NONFINANCIAL SECTOR: INTEREST COVERAGE*** x

12 12

10 10

8 8

6 6

Ann% NONFINANCIAL SECTOR: AFTER-TAX CASH FLOW (LS) Ann%


Chg ISM MANUFACTURING COMPOSITE INDEX**** (RS) Chg
70
10
60

0 50

40
-10

% C&I LENDING STANDARDS***** %


80 80
TIGHTENING STANDARDS

40 40

0 0
EASING STANDARDS

Ann% Ann%
INDUSTRIAL PRODUCTION (LS)
Chg Chg
10 TOTAL BUSINESS SALES MINUS INVENTORY****** (RS)
10

0 0

-10
-10

JOB CUT ANNOUNCEMENTS*******:


Mn Mn
12-MONTH MOVING TOTAL
2.5 3-MONTH MOVING TOTAL 2.5
(Annualized)
2.0 2.0
1.5 1.5
1.0 1.0
.5 BCA Research 2017 .5

1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018
* SOURCE: MOODY'S INVESTORS SERVICE
** BASED ON INDUSTRIAL PRODUCTION, LENDING STANDARDS, NON-FINANCIAL SECTOR PROFIT GROWTH AND INTEREST COVERAGE
*** NONFINANCIAL CORPORATE SECTOR CASH FLOW DIVIDED BY INTEREST EXPENSE
**** SOURCE: INSTITUTE OF SUPPLY MANAGEMENT
***** AVERAGE OF SMALL AND LARGE BUSINESSES, SOURCE: FEDERAL RESERVE
****** SHOWN ADVANCED BY 6 MONTHS, SOURCE: DEPARTMENT OF COMMERCE
*******SOURCE: CHALLENGER, GRAY & CHRISTMAS

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BCA RESEARCH INC. U.S. BOND STRATEGY - WEEKLY REPORT MARCH 14, 2017

It is a good FF An improving sales/inventory ratio portends a CHART 8

return to positive industrial production growth Energy Contributed To Junk Sell-Off


time to BPs BPs

upgrade 800 HIGH-YIELD 800


FF Job cut announcements have fallen back to OPTION-ADJUSTED SPREAD*
high-yield 2011 levels on a trailing 12-month basis
from neutral 600 600

to overweight. Meantime, even though the default outlook con-


tinues to improve, junk spreads have actually 400 400
widened during the past couple of weeks. The OAS DIFFERENTIAL**: HIGH-YIELD
BPs US$/
ENERGY LESS OVERALL INDEX (LS)
average option-adjusted spread on the Bloom- WTI CRUDE OIL PRICE (Inverted, RS)
Bbl

berg Barclays High-Yield index has widened


from a low of 344 basis points up to 378 bps 30
800
(Chart 8). Some of that spread increase is likely
attributable to declining oil prices, as energy 40
sector credits have indeed underperformed the 400

overall index. However, the underperformance


50
of the energy sector also started before the
0
sharp drop in oil prices (Chart 8, bottom panel). BCA Research 2017

JUL OCT JAN APR JUL OCT JAN APR


In any event, our commodity strategists are not 2015 2016
expecting the current decline in oil prices to * SOURCE: BLOOMBERG BARCLAYS INDICES
**OPTION-ADJUSTED SPREAD, DURATION-MATCHED, SOURCE: BLOOMBERG
BARCLAYS INDICES
persist and their estimates show that the oil
market has recently shifted from an environ-
ment of excess supply to one of excess demand. U.S. crude oil inventories are poised to decline
later this month and the OPEC / non-OPEC production deal negotiated by the Kingdom of Saudi
Arabia and Russia at the end of last year should be met with high compliance.3 If this view is cor-
rect, then the energy sector will not drag overall junk spreads wider in the months ahead.

The combination of wider junk spreads and an improving default outlook has led to an increase
in our preferred gauge of value for high-yield bonds the default-adjusted spread (Chart 9). The
default-adjusted spread is calculated by subtracting an ex-ante estimate of default losses from the
average spread on the Bloomberg Barclays High-Yield index.

To arrive at an estimate of default losses we use the Moodys baseline forecast for the default rate
and our own forecast for the recovery rate based on the historical relationship between recoveries and
defaults. With the release of Februarys default report, the Moodys baseline default rate forecast fell to
3.14% for the next 12 months. Based on this forecast we estimate that the recovery rate will be 44%.

Combining the default and recovery rate forecasts gives an estimate for default losses of 3.14%
x (1- 0.44) = 176 bps for the next 12 months. Since the average option-adjusted spread of the

3
Please see Commodity & Energy Strategy Weekly Report, Feds Pre-Emptive Hike Will Hit Gold, Not Oil, dated March 9, 2017,
available at ces.bcaresearch.com

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BCA RESEARCH INC. U.S. BOND STRATEGY - WEEKLY REPORT MARCH 14, 2017

Discover CHART 9 Bloomberg Barclays High-Yield index is


Some Value Returns To High-Yield currently 378 bps, we calculate the default-
what you BPs BPs
HIGH-YIELD DEFAULT-ADJUSTED
can do SPREAD*
adjusted spread to be: 378 bps - 176 bps
1500 1500
with BCA = 202 bps.
Analytics. A default-adjusted spread of 202 bps is 60
1000 1000
bps higher than the reading of 142 bps that
prevailed just last week. This 60 bps spread
500 500
advantage makes a considerable difference
in terms of projected excess returns.
% HIGH-YIELD 12-MONTH %
TRAILING DEFAULT RATE** Chart 10 shows the relationship between
MOODY'S BASELINE FORECAST
15 15 12-month excess returns and the starting
default-adjusted spread. We observe a reason-
10 10 ably strong correlation and note that, using a
linear regression, an extra 60 bps of spread
5 5
translates to an extra +251 bps of excess
return on average over a 12-month period.

Table 1 provides more detail in terms of


% HIGH-YIELD 12-MONTH TRAILING %
RECOVERY RATE** what excess returns have historically been
BCA MODEL***
60 60 associated with different levels of the
default-adjusted spread. We see that when
50 50
the default-adjusted is between 100 bps
40 40 and 150 bps, high-yield bonds earn positive
30 30
excess returns 64% of the time over the fol-
lowing 12 months. When the default-adjusted
20 20
spread is between 200 bps and 250 bps,
% HIGH-YIELD 12-MONTH TRAILING % high-yield earns a positive 12-month excess
12 DEFAULT LOSSES**** 12
BCA FORECAST*****
return 71% of the time.

Given our upbeat assessment of the trend


8 8
in defaults and a wider junk spread than we
have seen in a while, we think it is a good
4 4 time to upgrade high-yield from neutral to
overweight. The key near-term risk to this
BCA Research 2017 view is that the Fed will be more hawkish
2002 2004 2006 2008 2010 2012 2014 2016 2018 than we anticipate at this weeks meeting.
* OPTION-ADJUSTED SPREAD LESS FORECASTED DEFAULT LOSSES
BASED ON MOODY'S BASELINE DEFAULT RATE FORECAST, DASHED
HORIZONTAL LINES DENOTE HISTORICAL MEAN AND +/- ONE STANDARD
DEVIATION, SOURCE: BLOOMBERG BARCLAYS INDICES AND MOODY'S If the Feds median forecast is revised up to
INVESTORS SERVICE
** SOURCE: MOODY'S INVESTORS SERVICE four hikes in 2017, then it is possible that
*** MODEL BASED ON DEFAULT RATE
**** CALCULATED AS: DEFAULT RATE (1 - RECOVERY RATE) the recent bout of junk spread widening will
*****BASED ON MOODY'S BASELINE DEFAULT RATE FORECAST & BCA
RECOVERY RATE FORECAST

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BCA RESEARCH INC. U.S. BOND STRATEGY - WEEKLY REPORT MARCH 14, 2017

When the CHART 10


12-Month Excess High-Yield Returns Vs. Ex-Ante Default-Adjusted Spread (2002 Present)
default- 60

adjusted
spread is
between 200 40
12-MONTH EXCESS RETURNS** (%)

bps and 250


bps, high- Y = 0.0418X - 8.9656
yield earns 20
R = 0.3446

positive
12-month
excess 0

returns 81%
of the time.
-20

BCA Research 2017

-40
0 100 200 300 400 500 600 700 800
EX-ANTE DEFAULT-ADJUSTED* SPREAD (BPS)
* OPTION-ADJUSTED SPREAD LESS FORECASTED DEFAULT LOSSES BASED ON MOODY'S BASELINE DEFAULT RATE FORECAST.
** RELATIVE TO A DURATION-MATCHED POSITION IN TREASURY SECURITIES.
SOURCE: BLOOMBERG BARCLAYS INDICES, MOODY'S INVESTORS SERVICE.

TABLE 1
12-Month High-Yield Excess Returns & Ex-Ante Default-Adjusted Spread
HIGH-YIELD 12-MONTH EXCESS RETURN** (%)
% OF EPISODES
90%
# OF WITH POSITIVE
AVERAGE BEST WORST CONFIDENCE
OCCURRENCES EXCESS
INTERVAL
RETURNS
[-200, -150) 0 N/A N/A N/A N/A N/A
[-150, -100) 0 N/A N/A N/A N/A N/A
HIGH-YIELD EX-ANTE DEFAULT-ADJSUTED SPREAD* (BPs)

[-100, -50) 0 N/A N/A N/A N/A N/A


[-50, 0) 0 N/A N/A N/A N/A N/A
[0, 50) 3 -10.71 -8.76 -12.44 -12.46, -8.95 0
[50, 100) 8 -9.36 1.16 -15.23 -12.66, -6.06 13
[100, 150) 11 4.18 48.44 -12.38 -3.8, 12.16 64
[150, 200) 23 -1.76 8.13 -32.33 -5.11, 1.59 61
[200, 250) 21 4.78 13.58 -9.72 2.65, 6.91 71
[250, 300) 19 -1.22 13.75 -38.29 -5.38, 2.94 47
[300, 350) 21 4.55 22.46 -34.84 -0.12, 9.22 76
[350, 400) 17 6.65 25.54 -26.96 0.95, 12.36 65
[400, 450) 15 6.68 20.92 -9.43 3.51, 9.86 80
[450, 500) 8 2.72 14.97 -26.89 -5.28, 10.72 63
[500, 550) 11 10.63 52.16 -25.03 1.3, 19.96 73
[551, 600) 6 18.36 39.43 3.97 9.38, 27.34 100
[600, 650) 4 16.29 23.37 12.63 12.23, 20.36 100
[650, 700) 2 17.74 19.26 16.23 15.25, 20.24 100
* OPTION-ADJUSTED SPREAD LESS FORECASTED DEFAULT LOSSES BASED ON MOODYS BASELINE DEFAULT RATE FORECAST.
** RELATIVE TO A DURATION-MATCHED POSITION IN TREASURY SECURITIES.
SOURCE: BLOOMBERG BARCLAYS INDICES, MOODY'S INVESTORS SERVICE

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BCA RESEARCH INC. U.S. BOND STRATEGY - WEEKLY REPORT MARCH 14, 2017

Discover have a bit further to run. However, given still-low inflation readings, the Fed would eventually be
what you forced to back away from its hawkish rhetoric and support renewed spread tightening. In our view,
can do the main risk to upgrading junk this week is that we are a bit too early.
with BCA Bottom Line: Junk spreads have widened even though default rate indicators continue to show
Analytics. improvement. With valuations now looking more attractive, we upgrade high-yield from neutral to
overweight.

Ryan Swift, Vice President


U.S. Bond Strategy
rswift@bcaresearch.com

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BCA RESEARCH INC. U.S. BOND STRATEGY - WEEKLY REPORT MARCH 14, 2017

Fixed Income Sector Returns


EXCESS RETURNS1 OPTION-ADJUSTED TOTAL RETURNS
As of March 10, 2017
(BASIS POINTS) SPREAD (BPS) (PERCENT)
MONTH- YEAR- YEAR-TO-DATE MONTH- YEAR-
CURRENT
TO-DATE TO-DATE CHANGE TO-DATE TO-DATE
BARCLAYS AGGREGATE 43 0 -1.21% -0.35%
TREASURY INDEX -1.18% -0.47%
GOVERNMENT RELATED INDEX 12 63 66 -8 -0.91% 0.28%
MBS -14 -34 27 12 -1.06% -0.62%
CMBS 25 42 83 -4 -0.82% 0.07%
ABS 16 21 51 -8 -0.20% 0.16%
CORPORATE INDEX -10 43 116 -7 -1.56% -0.12%
HIGH-YIELD -35 203 378 -31 -1.10% 1.80%
MUNICIPALS 39 98 -0.87% 0.48%
S&P 500 0.45% 6.42%
DATA AS OF MARCH 10, 2017, SOURCE: BARCLAYS, STANDARD AND POOR'S
1 CURVE-ADJUSTED EXCESS RETURN RELATIVE TO A TERM STRUCTURE-MATCHED POSITION IN TREASURIES
2 HISTORICAL RETURNS ARE FOR THE BARCLAYS MASTER INDEX (I.E. BEFORE ADJUSTING FOR TAXES)

Recommended Portfolio Specification


PORTFOLIO DURATION
BELOW BENCHMARK
PORTFOLIO ALLOCATION
SECTOR INVESTMENT STANCE*

TREASURIES 2
Nominals 1
TIPS 4
SPREAD PRODUCT 4
Corporates 4
High-Yield 3 4
MBS 2
Government-Related 2
Municipals 3
ABS 5
Non-Agency CMBS 2
Agency CMBS 4
* RECOMMENDED PORTFOLIO WEIGHTING RELATIVE TO BENCHMARK.
LEGEND:
1-MAX UNDERWEIGHT 2-UNDERWEIGHT 3-BENCHMARK WEIGHTING
4-OVERWEIGHT 5-MAX OVERWEIGHT

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