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MARKETVIEW U.S.FixedIncome:ARefresheronRisingRates April10,2017 4910 Views Here,werevisitthequestionofhowU.S.taxablebondsmayfareinthefaceof risinginterestrates. Inlastweek’sMarketView,welookedattheperformanceofthemunicipalbondmarketduring periodsofU.S.FederalReserve(Fed)ratehikes.WeshowedthatnotallFed-tighteningcycles arethesame.DuringcertainperiodswhentheFedhadraisedratesinaslowandgradualmanner, throughawell-communicatedstrategy,long-termratesremainedrelativelystable,andlong-term bondsperf ormedwell. Asabondinvestor,itof tenismoreimportanttoconsidermovesinlonger-termratesratherthan changesintheovernightratesdirectlycontrolledbytheFed,namelythef edf undsrate.So,when investorsaskabouttheimpactof higherrates,ourf irstresponseisof ten:Whichratesareyou talkingabout—f edf unds,U.S.Treasuryyields,orsomeothercategory? Credit-sensitiveandequity-relatedsegmentsofthebondmarkethavehistoricallyhavegeneratedpositivereturnsduring periodsofrisingT reasuryyields. Inaddition,historyhasshownthattherecanbeawiderangeof returnsbyU.S.f ixed-income assetclass,dependingonthemarketenvironment.So,anequallyimportantquestionsurf aces: Whichtypesof bondsdoyouown?Thisweek,wewillreviewtheperf ormanceof variousbond sectorsduringperiodof risinglong-termrates,asmeasuredbythe(representative)10-yearU.S. Treasurynoteyield. Thef inancialmediaof tenhavecharacterizedthepastthreedecadesasa“30-yearbullmarketf or bonds.”ButasillustratedinChart1,whichtracksthemovementof theyieldonthe10-year Treasurynote,thisbullmarkethasnotmovedinastraightline.Whileitgenerallyhasbeenan environmentof declininginterestrates,therehavebeeneightseparateperiodswhenthe10-year Treasuryyieldhasjumpedbymorethan100basispoints(bps)overashortperiod,mostrecently inthesecondhalf of 2016. Chart1.U.S.TreasuriesHavePostedNegativeReturnsWhenYieldsRoseMoreThan 100BasisPoints Returnon10-yearU.S.Treasurysecuritiesduringeightperiodsofgreaterthan100basis-point increaseinthe10-yearU.S.Treasuryyield,March31,1993–March31,2017 1 Source:BloombergandMorningstar. Note:10-yearTreasuryyieldasrepresentedbytheBloombergGeneric10-YearUnitedStatesGovernmentNote.10yearTreasuryperf ormanceasrepresentedbytheCitigroup10-YearTreasuryBondIndex. *Riseof 100basispointsmusthaveoccurredwithina16-monthtimeperiod. Pastperformanceisnoguaranteeoffutureresults.Perf ormanceduringotherperiodsmayhavebeendif f erent. WhichBondsDoYouOwn? Table1summarizesthereturnsof variousassetclassesduringtheseeightperiodsof rising Treasuryyields.Eachof theseperiodsledtonegativereturnsf orthe10-yearTreasurynote,as higheryieldstranslatedtolowerprices,withanaveragelossof 7.3%duringtheseeightperiods. Table1.Historically,Lower-Duration,Credit-SensitiveBondsHavePerformedWellin PeriodsofRisingLong-TermU.S.TreasuryYields Indexreturnsduringperiodsofincreasesgreaterthan100basispointsinthe10-yearU.S. Treasuryyield(month-endreturns) 2 Source:Morningstar. 1Citigroup10-YearTreasuryBondIndex.2 BloombergBarclaysU.S.AggregateBondIndex.3Bof AMerrillLynchU.S. CorporateBBB-Rated1-3YearIndex.4 Bof AMerrillLynchHighYieldMasterIIConstrainedIndex.5 CreditSuisse LeveragedLoanIndex.6 BloombergBarclaysU.S.FloatingRateNoteIndex.7 Bof AMerrillLynchU.S.Convertible Index.8 S&P500 ® Index. Pastperformanceisnoguaranteeoffutureresults.Perf ormanceduringothertimeperiodsmayhavebeen dif f erentornegative. However,dif f erentassetclasseshadverydif f erentexperiencesintheseepisodes:long-duration government-relatedsecuritiessuf f eredthemost,whilelower-durationandmorecredit-sensitive bondshistoricallyperf ormedwell.TheBloombergBarclaysU.S.AggregateBondIndex,whichnow hasanef f ectivedurationof 6.0yearsandislargelycomprisedof U.S.Treasuriesand government-relatedsecurities,generatedlossesinsevenof theseeightperiods. Movingdowntolower-durationandlower-ratedcredit,youwillseepositivereturnsinshort-term corporatebonds,high-yieldcorporatebonds,andf loating-ratebankloansinalleightperiods. Lookingatequity-relatedsecurities,stockswerepositiveineveryperiod,whileconvertiblebonds werepositiveinallperiodsbutone. WhyHasCreditDoneWellWhenRatesRise? HigherTreasuryratesof tencoincidewithanimprovingeconomy,whichmayleadtoarisein corporateearnings,bettercreditf undamentals,andincreasinginvestorappetitetotakeonrisk, resultingindecliningcreditspreads.Thatspreadcompressioncanhelpof f setthemovehigherin Treasuryrates.Thenif welookatspecif icassetclasses,wef ind: Short-termcorporatebonds—Lowdurationleadstolimitedpricemovementsintheface ofrisingrates.Additionalyieldspreadovergovernment-relatedsecuritiesprovideshigher income,whilepotentialspreadtighteningcanpartiallyoffsethigherTreasuryrates. High-yieldcorporatebonds—Althoughhigh-yieldbondsmayhaveanintermediatestated duration,theyhistoricallyhavehadnegativecorrelationwithU.S.Treasurybonds.The 3 effectofrisingTreasuryyieldshasoftenbeenoffsetbyspreadcompressionandhigh couponincome,leadingtopositivereturnsinperiodsofrisingrates. Floating-rateloans—Loansalsobenefitfromanimprovementincorporatecredit associatedwithastrengtheningeconomy.Sinceloanshavecouponsthatadjustwithshorttermrates,typicallyevery90days,theycanbenefitfromariseinthebenchmarkLIBOR (theLondoninterbankofferedrate,whichtypicallymovesinlinewiththefedfundsrate).In addition,sinceloansdonothavethedurationexposureoftypicalfixed-ratebonds,prices arenotaffectedbymovesinlong-termrates. WhatDoesDurationTellUs? Whenconsideringtheinterest-rateexposureof af ixed-incomeportf olio,manyinvestorslookat theportf olio’sef f ectiveduration.Asanexample,f ollowingthesimplemathusedtoillustratethe concept,aportf oliowithanef f ectivedurationof 5.0yearsisexpectedtodeclinebyapproximately 5%f ora100basis-pointmoveinrates.However,thereareaf ewpointstokeepinmind: A“100basis-pointmoveinrates”referstoamoveintheyieldtomaturityonthatbondor portfolio,nottheovernightfedfundsrate. Thedeclineof“approximately5%”istheexpectedpricedecline,assumingthatthe100 basis-pointmoveinratesoccursimmediately,anddoesnotconsideranyincomeearned overtime. Durationisamathematicalcalculationbasedonthetimingofcashflowsonabond.It doesnot,however,accountforthenegativecorrelationbetweenratemovesandspread movesillustratedabove.Inotherwords,thiscalculationdoesnotadjustforthedifferent behaviorofaU.S.Treasurybondandahigh-yieldcorporatebondthateachmayhavea 5.0-yeareffectiveduration. Durationalonedoesnotgiveagoodindicationofinterestratesensitivity. So,ratherthansimplyf ocusingonthestateddurationof aportf olio,itmaybebettertoexamine theinterest-ratesensitivityof theportf olio.ThedatainTable1provideevidencethatef f ective durationalonedoesnotgiveagoodindicationof trueinterest-ratesensitivityof credit-related bondsectors,andsoisapoorindicatorof howsuchbondsmayperf ormduringrisingrateperiods. Anotherwaytoviewtheserelationshipsisthroughcorrelationdata.Chart2showsthat‘BBB’rated corporatebondsandhigh-yieldcorporatebonds,bothwithintermediateef f ectivedurations, historicallyhavehadlowornegativecorrelationwithU.S.Treasuries. Chart2.WhichBondCategoriesHavetheLowestCorrelationwithU.S.Treasuries? CorrelationwithBloombergBarclaysU.S.GovernmentBondIndex,trailing10yearsasofMarch 30,2017 4 Source:Morningstar. 1BloombergBarclaysU.S.GovernmentBondIndex.2 BloombergBarclaysU.S.AggregateBondIndex.3Bloomberg BarclaysU.S.TreasuryU.S.TIPSIndex.4 BloombergBarclaysU.S.CorporateBaa-RatedIndex.5 Bof AMerrillLynch U.S.CorporateBBB-Rated1-3YearIndex.6 BloombergBarclaysU.S.FloatingRateNoteIndex.7 BloombergBarclays U.S.CorporateHighYieldIndex.8 Bof AMerrillLynchU.S.ConvertibleIndex.9 S&P500 ® Index.10 CreditSuisse LeveragedLoanIndex. Pastperformanceisnoguaranteeoffutureresults.Correlationisastatisticthatmeasuresthedegreeof associationbetweentwovariables. SummingUp If historyisanyguide,investorswhoareexpectingarising-rateenvironmentmaywanttof avor lower-durationassets.Butaninvestormaybebetterservedbydiggingalittledeeper—gaininga greaterunderstandingof thetrueinterest-ratesensitivityof hisorherportf olio,whichcannotbe measuredbydurationalone. ThisMarketViewmaycontainassumptionsthatare“f orward-lookingstatements,”whicharebasedoncertain assumptionsof f utureevents.Actualeventsaredif f iculttopredictandmaydif f erf romthoseassumed.Therecanbe noassurancethatf orward-lookingstatementswillmaterializeorthatactualreturnsorresultswillnotbematerially dif f erentf romthosedescribedhere. ANoteaboutRisk:Thevalueof investmentsinf ixed-incomesecuritieswillchangeasinterestratesf luctuateandin responsetomarketmovements.Generally,wheninterestratesrise,thepricesof debtsecuritiesf all,andwhen interestratesf all,pricesgenerallyrise.Bondsmayalsobesubjecttoothertypesof risk,suchascall,credit,liquidity, interest-rate,andgeneralmarketrisks.High-yieldsecurities,sometimescalledjunkbonds,carryincreasedrisksof pricevolatility,illiquidity,andthepossibilityof def aultinthetimelypaymentof interestandprincipal.Moreover,the specif iccollateralusedtosecurealoanmaydeclineinvalueorbecomeilliquid,whichwouldadverselyaf f ectthe loan’svalue.Longer-termdebtsecuritiesareusuallymoresensitivetointerest-ratechanges;thelongerthematurity of asecurity,thegreatertheef f ectachangeininterestratesislikelytohaveonitsprice.Lower-ratedbondsmaybe subjecttogreaterriskthanhigher-ratedbonds.Noinvestingstrategycanovercomeallmarketvolatilityorguarantee 5 f utureresults.Statementsconcerningf inancialmarkettrendsarebasedoncurrentmarketconditions,whichwill f luctuate. TreasuriesaredebtsecuritiesissuedbytheU.S.governmentandsecuredbyitsf ullf aithandcredit.Incomef rom Treasurysecuritiesisexemptf romstateandlocaltaxes.AlthoughU.S.governmentsecuritiesareguaranteedasto paymentsof interestandprincipal,theirmarketpricesarenotguaranteedandwillf luctuateinresponsetomarket movements. Abasispointisoneone-hundredthof apercentagepoint. Durationisthechangeinthevalueof af ixed-incomesecuritythatwillresultf roma1%changeinmarketinterest rates.Generally,thelargeraportf olio’sduration,thegreatertheinterest-rateriskorrewardf orunderlyingbond prices. Abondyieldistheamountof returnaninvestorwillrealizeonabond.Thoughseveraltypesof bondyieldscanbe calculated,nominalyieldisthemostcommon.Thisiscalculatedbydividingtheamountof interestpaidbythef ace value. IntheUnitedStates,federalfunds(of tenref erredtoasfedfunds)areovernightborrowingsbetweenbanksand otherentitiestomaintaintheirbankreservesattheU.S.FederalReserve.BankskeepreservesatFederalReserve Bankstomeettheirreserverequirementsandtoclearf inancialtransactions. TheLondoninterbankofferedrate(LIBOR)isaninterestrateatwhichbankscanborrowf unds,inmarketablesize, f romotherbanksintheLondoninterbankmarket.TheLIBORisf ixedonadailybasisbytheBritishBankers' Association.TheLIBORisderivedf romaf ilteredaverageof theworld'smostcreditworthybanks'interbankdeposit ratesf orlargerloanswithmaturitiesbetweenovernightandonef ullyear. TIPS(Treasuryinflation-protectedsecurities)areU.S.Treasurysecuritiesindexedtoinf lationinordertoprotect investorsf romthenegativeef f ectsof inf lation.Theprincipalof aTIPisadjustedaccordingtotheCPI-U.Witharise intheindex,orinf lation,theprincipalincreases.Withaf allintheindex,ordef lation,theprincipaldecreases.Though therateisf ixedandpaidsemi-annually,interestpaymentsvarybecausetherateisappliedtotheadjustedprincipal. Specif ically,theamountof eachinterestpaymentisdeterminedbymultiplyingtheadjustedprincipalbyone-half the interestrate.Uponmaturity,TIPSpaytheoriginaloradjustedprincipalamount,whicheverisgreater.BecauseTIPS areadjustedf orinf lation,achangeinrealinterestrates(butnotnominalinterestrates)willaf f ectthevalueof TIPS. Whenrealinterestratesrise,thevalueof TIPSwilldecline,andwhenrealinterestratesf all,thevalueof TIPSwill rise. TheBloombergBarclaysCorporatesBaaIndexistheBaacomponentof theBloombergBarclaysU.S.Corporate InvestmentGradeIndex.TheindexincludespubliclyissuedU.S.corporateandspecif iedf oreigndebenturesand securednotesthatmeetthespecif iedmaturity,liquidity,andqualityrequirements.Toqualif y,bondsmustbeSECregistered. TheBloombergBarclaysU.S.AggregateBondIndexrepresentssecuritiesthatareSEC-registered,taxable,and dollardenominated.TheIndexcoverstheU.S.investment-gradef ixed-ratebondmarket,withindexcomponentsf or governmentandcorporatesecurities,mortgagepass-throughsecurities,andasset-backedsecurities.Totalreturn comprisespriceappreciation/depreciationandincomeasapercentageof theoriginalinvestment. TheBloombergBarclaysU.S.CorporateHighYieldBondIndexisamarketvalue-weightedindexwhichcoversthe U.S.non-investmentgradef ixed-ratedebtmarket.Theindexiscomposedof U.S.dollar-denominatedcorporatedebt inIndustrial,Utility,andFinancesectorswithaminimum$150millionparamountoutstandingandamaturitygreater than1year.Theindexincludesreinvestmentof income. 6 TheBloombergBarclaysU.S.FloatingRateNoteIndexisdesignedtomeasuretheperf ormanceof U.S.dollardenominated,investmentgradef loatingratenotes. TheBloombergBarclaysU.S.GovernmentBondIndexisamarketvalue-weightedindexcomposedof allpublicly issued,nonconvertible,domesticdebtof theU.S.governmentoranyagencythereof ,quasi-f ederalcorporations,or corporatedebtguaranteedbytheU.S.government.Flowerbondsandpass-throughissuesareexcluded.Totalreturn consistsof priceappreciation/depreciationplusincomeasapercentageof theoriginalinvestment.Indexesare rebalancedmonthlybymarketcapitalization. TheBloombergBarclaysU.S.TIPSIndexisanunmanagedindexcomprisedof U.S.TreasuryInf lationProtected Securitieswithatleast$1billioninoutstandingf acevalue. TheBofAMerrillLynchU.S.HighYieldMasterIIConstrainedIndextrackstheperf ormanceof USdollar denominatedbelowinvestmentgradecorporatedebtpubliclyissuedintheUSdomesticmarket.Qualif yingsecurities musthaveabelowinvestmentgraderating(basedonanaverageof Moody’s,S&PandFitch),atleast18monthsto f inalmaturityatthetimeof issuance,atleastoneyearremainingtermtof inalmaturityasof therebalancingdate,a f ixedcouponscheduleandaminimumamountoutstandingof $100million. TheBofAMerrillLynchU.S.CorporateBBB-Rated1-3YearIndexisanunmanagedindexcomprisedof U.S.dollar denominatedinvestmentgradecorporatedebtsecuritiespubliclyissuedintheU.S.domesticmarketwithbetweenone andthreeyearremainingtof inalmaturity. TheBofAMerrillLynchU.S.ConvertibleIndextrackstheperf ormanceof publiclyissuedU.S.dollar-denominated convertiblesecuritiesof U.S.companies.Qualif yingsecuritiesmusthaveatleast$50millionf aceamountoutstanding andatleastonemonthremainingtothef inalconversiondate. SourceMerrillLynch,Pierce,Fenner&SmithIncorporated(“Bof AML”),usedwithpermission.Bof AMLPERMITSUSE OFTHEBof AMLINDICESANDRELATEDDATAONAN"ASIS"BASIS,MAKESNOWARRANTIESREGARDINGSAME, DOESNOTGUARANTEETHESUITABILITY,QUALITY,ACCURACY,TIMELINESS,AND/ORCOMPLETENESSOF THEBof AMLINDICESORANYDATAINCLUDEDIN,RELATEDTO,ORDERIVEDTHEREFROM,ASSUMESNO LIABILITYINCONNECTIONWITHTHEUSEOFTHEFOREGOING,ANDDOESNOTSPONSOR,ENDORSE,OR RECOMMENDLORD,ABBETT&CO.LLC.,ORANYOFITSPRODUCTSORSERVICES. TheCitigroup10YearTreasuryBondIndexisabroadmeasureof theperf ormanceof themedium-termU.S. Treasurysecurities. TheCreditSuisseLeveragedLoanIndexisdesignedtomirrortheinvestableuniverseof theU.S.dollardenominatedleveragedloanmarket. TheS&P500 ® Indexiswidelyregardedasthestandardf ormeasuringlargecapU.S.stockmarketperf ormanceand includesarepresentativesampleof leadingcompaniesinleadingindustries. ANoteaboutIndexes:Indexesareunmanaged,donotref lectthedeductionof f eesorexpenses,andarenot availablef ordirectinvestment.Indexesdepictedhereinaref orillustrativepurposesonlyanddonotrepresentany specif icportf oliosmanagedbyLordAbbettoranyparticularinvestments.Otherindexesmaynothaveperf ormedin thesamemannerundersimilarconditions. Thecreditqualityof thesecuritiesinaportf olioisassignedbyanationallyrecognizedstatisticalratingorganization (NRSRO),suchasStandard&Poor’s,Moody’s,orFitch,asanindicationof anissuer’screditworthiness.Ratings rangef rom‘AAA’(highest)to‘D’(lowest).Bondsrated‘BBB’oraboveareconsideredinvestmentgrade.Creditratings ‘BB’andbelowarelower-ratedsecurities(junkbonds).High-yielding,non-investment-gradebonds(junkbonds)involve higherrisksthaninvestmentgradebonds.Adverseconditionsmayaf f ecttheissuer’sabilitytopayinterestand 7 principalonthesesecurities. TheopinionsinMarketViewareasof thedateof publication,aresubjecttochangebasedonsubsequent developments,andmaynotref lecttheviewsof thef irmasawhole.Thematerialisnotintendedtoberelieduponas af orecast,research,orinvestmentadvice,isnotarecommendationorof f ertobuyorsellanysecuritiesortoadopt anyinvestmentstrategy,andisnotintendedtopredictordepicttheperf ormanceof anyinvestment.Readersshould notassumethatinvestmentsincompanies,securities,sectors,and/ormarketsdescribedwereorwillbeprof itable. Investinginvolvesrisk,includingpossiblelossof principal.Thisdocumentispreparedbasedontheinf ormationLord Abbettdeemsreliable;however,LordAbbettdoesnotwarranttheaccuracyandcompletenessof theinf ormation. Investorsshouldconsultwithaf inancialadvisorpriortomakinganinvestmentdecision. Investorsshouldcarefullyconsidertheinvestmentobjectives,risks,chargesandexpensesof theLordAbbettFunds.Thisandotherimportantinformationiscontainedinthefund's summaryprospectusand/orprospectus.Toobtainaprospectusorsummaryprospectusonany LordAbbettmutualfund,youcanclickhereorcontactyourinvestmentprofessionalorLord AbbettDistributorLLCat888-522-2388.Readtheprospectuscarefullybeforeyouinvestor sendmoney. NotFDIC-Insured.Maylosevalue.Notguaranteedbyanybank.Copyright©2017Lord,Abbett& Co.LLC.Allrightsreserved.LordAbbettmutualfundsaredistributedbyLordAbbett DistributorLLC.ForU.S.residentsonly. Theinformationprovidedisnotdirectedatanyinvestororcategoryofinvestorsandis providedsolelyasgeneralinformationaboutLordAbbett’sproductsandservicesandto otherwiseprovidegeneralinvestmenteducation.Noneoftheinformationprovidedshouldbe regardedasasuggestiontoengageinorrefrainfromanyinvestment-relatedcourseofaction asneitherLordAbbettnoritsaffiliatesareundertakingtoprovideimpartialinvestmentadvice, actasanimpartialadviser,orgiveadviceinafiduciarycapacity.Ifyouareanindividual retirementinvestor,contactyourfinancialadvisororotherfiduciaryaboutwhetheranygiven investmentidea,strategy,productorservicemaybeappropriateforyourcircumstances. 8