Download Passing the Baton to Fiscal Policy

Global Fixed Income Bulletin
Passing the Baton to
Fiscal Policy
FIXED INCOME | GLOBAL FIXED INCOME TEAM | MACRO INSIGHT | NOVEMBER 2016
Outlook
• Economic fundamentals are looking better than the bearish
consensus. Yet, politics has been more disruptive to markets this
year than expected and could get more fraught in 2017, with U.S.
presidential and core European elections, Brexit negotiations and
the Chinese politburo transition. We believe in this environment,
riskier spread products could weather a gradual rise in risk-free
rates, especially if it is supported by stabilizing or improving
economic fundamentals. However, we are cognizant that, as
psychological resistance levels get broached, rising yields
could take on a life of their own. We have been reducing risk to
help stay ahead of a possible bond tantrum and prefer spread
exposures that are less correlated to interest-rate movement.
• Subject to potential near-term event risks being resolved in the
next few weeks, we remain optimistic about the prospects for
emerging market (EM) fixed income for the remainder of the year
as fundamentals, technicals and the macro environment remain
supportive. China’s growth slowdown is likely to continue in
the medium term, with short-term growth prospects reliant on
continued fiscal and monetary policy support.
• We anticipate U.S. investment-grade (IG) credit will continue
to outperform European IG, as the technical picture remains
more supportive in the U.S. due to a more favorable yield
environment. We maintain our constructive view on high yield as
the global demand for yield continues to support this asset class
in both the U.S. and Europe.
Bearish views on global growth and inflation as well as
technical forces from central bank bond purchases have
served to push term premium down for much of 2016, driving
risk-free yields lower than fundamentals would suggest. Those
forces are now reversing. We have been saying that the overall
market underappreciates the potential for higher inflation,
improvements in economic data and policy change. The
consensus has been bearish on economic fundamentals for a
TABLE OF CONTENTS
1Outlook
2
Interest Rates & Currency Outlook
3
EM Outlook
3
Credit Outlook
3
Securitized Outlook
4
Market Summary
4
Developed Markets
5
Emerging Markets
6External
6Domestic
7Corporate
7
Corporate Credit
9
Securitized Products
The views and opinions expressed are those of the portfolio management team as of November 2016, and are subject
to change based on market, economic, and other conditions. Past performance is not indicative of future results.
GLOBAL FIXED INCOME BULLETIN
while, which means any positive surprise
could be a shock. October provided an
instance of what that could look like.
After a sharp fall in August, both euro
area PMI and U.S. ISM rebounded
strongly in September. In the U.K., PMI
for September hit new highs for the year.
Moreover, as oil prices have remained
stable in the past few months, their
negative drag on inflation has cleared,
leading to higher inflation in the euro
area, U.S. and U.K. In light of better
growth and inflation, most developedmarket 10-year yields increased by
more than 20 basis points (bps). U.S.
break-even inflation rates hit highs for
the year in the U.S., driven by rising
nominal yields.
The market has broadly priced in one
Federal Reserve (Fed) rate hike for 2016
and is forecasting two hikes in 2017. The
Fed has entertained the view that neutral
rates might be significantly lower going
forward, which would justify a shallower,
more cautious hiking path compared
to historical standards. This should be
supportive of rebounding inflation,
or in Yellen-speak, running a “highpressure economy.”
On top of better data, changes in
monetary policy have also become a
catalyst for steepening curves. In Japan,
the Bank of Japan (BoJ) is explicitly
maintaining steeper curves as it focuses
on yield curve control. We think the BoJ
is a leading indicator for what many other
central banks around the world might
do, notably the ECB, which is likely also
similarly re-examining policies that have
flattened the yield curve. The backlash
from pension fund and life insurance
underperformance has been increasing
as well, as have banks complaining about
their lack of profitability in the current
monetary policy regime.
As monetary policy faces diminishing
returns, we believe that fiscal easing
could be the next driver of markets.
In the U.K., the new Chancellor has
promised to increase public spending,
pushing back the deficit reduction
deadline. In Italy, Renzi is also looking
to increase deficit spending. Even in
Germany, the attitude toward austerity
is turning as Finance Minister Wolfgang
Schaeuble has talked of a tax cut in 2017
of around 0.5 percent of GDP. Finally,
given the campaign promises, we think
the new U.S. president will focus on
infrastructure spending, which would be
at a minimum a moderate fiscal boost.
Simply, the increased discussion of fiscal
policy suggests the course of monetary
policy as we have experienced it over the
past six years could be coming to an end.
Treasuries are more likely to be shaped
by technical forces related to global risk
premia, which we think could reverse
and drive yields higher, than economic
fundamentals. In 2017, we may see for
the first time since 2013, a combination
of bearish factors for higher-yielding
bonds: improving economic data/rising
inflation, less easy monetary policy and
rising risk premiums. As such, we remain
underweight U.S. duration, although
we remain overweight elsewhere, such
as in EM. We also believe that current
market pricing of inflation through
Treasury Inflation-Protected Securities
underestimates the potential for higher
inflation.
Higher yields and steeper yield curves
have been supported by improving
economic fundamentals but this year,
politics has been more disruptive to
markets than expected. We believe 2017
could be even more politically fraught
on the back of core European elections,
Brexit negotiations, the Chinese politburo
transition, the U.S. presidential election
and its likely fractious implications.
Thus, we believe there are opposing forces
at work that could cap a yield sell-off.
Riskier spread products could weather a
gradual rise in risk-free rates, especially if
it is supported by stabilizing or improving
economic fundamentals. However, we are
cognizant that, as psychological resistance
levels get broached, rising yields could
take on a life of their own. Thus, we have
been reducing risk to help stay ahead of a
possible bond tantrum and prefer spread
exposures that are less correlated to
interest-rate movements.
We expect continued European Central
Bank (ECB) purchases to pressure euro
periphery real yields lower, in order
to bring about the necessary financial
and economic rebalancing to increase
inflation expectations. Based on this view,
we continue to like inflation-protected
bonds in Italy and Spain and are slightly
negative on eurozone duration, although
we do not expect longer-maturity
core eurozone yields to break out of
recent ranges.
Interest Rates and Currency Outlook
Given the relative mediocrity of
the global economy and ongoing
uncertainties around the impact of the
China slowdown, Fed tightening and
Brexit, we expect the Fed to do all it can
to implement a “dovish” hiking path
and expectations of two 2017 rate hikes
are reasonable. But, longer-maturity
In our opinion, EM assets remain
attractive in this low-yielding, easy
money world. Central European bonds
remain attractive, as does Mexico,
Indonesia and Argentina. We are
tactically positive on Brazil, pending
confirmation that political change will
result in lasting reform.
In terms of currency positioning, we
have exposure to where we see value,
including the Norwegian kroner. Norway
has been one of the only G10 countries to
experience above-target inflation, while
the currency has depreciated quite a lot in
the past few years. We are underweight
the British pound in anticipation of
deteriorating growth caused by Brexit
uncertainties and the Japanese yen on the
back of the new steepening yield curve
bias of the BoJ.
The views and opinions expressed are those of the portfolio management team as of November 2016, and are subject to change based on
market, economic, and other conditions. Past performance is not indicative of future results.
2
MORGAN STANLEY INVESTMENT MANAGEMENT | FIXED INCOME
PASSING THE BATON TO FISCAL POLICY
EM Outlook
Subject to potential near-term event risks
being resolved in the next few weeks, we
remain optimistic about the prospects for
EM fixed income for the remainder of the
year as fundamentals, technicals and the
macro environment remain supportive. The
various factors both pushing and pulling
investors into EM fixed income remain
in place: developed market yields remain
very low, economic data in EM appears to
have stabilized, fears of multiple Fed rate
hikes have subsided and concerns of a sharp
slowdown in China have diminished. We
believe that EM assets could well absorb a
Fed rate hike in December; however, assets
remain vulnerable to rate hikes driven by
a surge in inflation. The EM/developed
market (DM) growth differential has
stabilized and appears to be recovering in
favor of EM as the negative growth impacts
from Brazil and Russia lessen. China’s
growth slowdown is likely to continue in
the medium term, with short-term growth
prospects reliant on continued fiscal and
monetary policy support. U.S. elections
reflect a potential event risk for some key
EMs and the outlook for global trade.
Credit Outlook
As we head into November we maintain
our cautiously optimistic view of global
credit. Technical factors remain supportive
of the asset class, especially in the U.S.
where foreign buying continues to have a
pervasive impact on yields. We anticipate
U.S. IG credit will continue to outperform
European IG as the technical picture
remains more supportive in the U.S. due
to a more favorable yield environment.
We maintain our constructive view on
high yield, as the global demand for yield
continues to support this asset class in
both the U.S. and Europe (as well as largescale ECB purchases). As we head into
year-end, rate volatility and price action,
central bank policy and the U.S. election
remain key macroeconomic themes that
will impact global credit performance and
our global credit outlook. In addition,
commodity price action and deteriorating
credit fundamentals remain credit-specific
risks that we continue to monitor as
potential negatives. Despite these potential
headwinds, however, we continue to
believe that the supportive environment in
credit will continue.
Securitized Outlook
We remain underweight U.S. agency
mortgage-backed securities (MBS) given
the historically low nominal spreads and
low option-adjusted spreads, combined
with near-record low mortgage rates.
Agency MBS have performed reasonably
well in 2016, driven largely by increased
demand for liquid and high credit quality
spread products. While agency MBS have
performed well over the past few years as
rates volatility has remained relatively low,
we believe that agency MBS appear to
be expensive from a historical spread and
yield perspective and that the downside
risks significantly outweigh the upside
potential and outweigh the current carry.
Additionally, we believe credit-sensitive
mortgage securities currently offer better
risk-adjusted return profiles and cash flow
carry. While we believe agency MBS will
continue to perform well in the near term,
we do not find agency MBS to be attractive
on a relative basis to credit-related MBS.
Non-agency MBS remains one of the
more stable and attractive fixed income
asset classes in our opinion. Given the
attractive carry, improving fundamentals
and shrinking net supply, we remain
overweight this sector. Non-agency
MBS offers spreads of 150-225 bps above
Treasuries for IG bonds, and 250-300 bps
for senior non-investment grade bonds on
a loss-adjusted basis. We remain positive
on the U.S. housing market given the
modest strength of the U.S. economy,
continued low mortgage rates and aboveaverage home affordability. From a supply
perspective, we project outstanding nonagency MBS to decline by $70 billion
to $80 billion in 2016, while new
securitizations are projected to only
amount to $30 billion to $40 billion.
We remain cautiously overweight
commercial mortgage-backed securities
(CMBS). CMBS have underperformed
most credit sectors in 2016, and
sponsorship for the sector still feels soft,
but we expect that commercial real estate
fundamental conditions will remain
strong as long as unemployment remains
low and the U.S. economy continues its
moderate growth. We believe CMBS
are poised to perform well as a result
of these healthy economic conditions,
but we have some concerns over supply/
demand dynamics given the recent spread
volatility and given our expectations
of future increases in new origination
and issuance. We also have some
concerns over late 2015 and 2016 vintage
origination CMBS due to the substantial
increase in property values over the
last few years. We favor more seasoned
CMBS issues, which have benefited from
recent property price appreciation, over
newly originated deals which may have
somewhat inflated property valuations as
part of their underwriting. Although we
expect continued volatility in CMBS in
2016, we still believe that CMBS offer
attractive yields and should continue to
benefit from improving fundamental
market conditions. While we remain
overweight, we are limiting our
overweight to a manageable level given
the increased volatility and mark-tomarket risk in this sector.
In Europe, we have decreased our
strong overweight positioning to a more
moderate overweight outlook for MBS
and CMBS. Spreads are now tighter
than pre-Brexit levels, even though we
believe fundamental conditions have
more uncertainty in the wake of the
Brexit vote. Overall, we remain positive
on the sector given the belief that the
ECB and BoE will continue to keep
interest rates low for the foreseeable
future, and that both the European
economies and, more importantly, the
respective real estate markets will benefit
from these accommodative policies. New
residential mortgage-backed securities
The views and opinions expressed are those of the portfolio management team as of November 2016, and are subject to change based on
market, economic, and other conditions. Past performance is not indicative of future results.
FIXED INCOME | MORGAN STANLEY INVESTMENT MANAGEMENT
3
GLOBAL FIXED INCOME BULLETIN
(RMBS) and CMBS issuance remains
disappointingly light in Europe, but we
are still finding a number of attractive
seasoned opportunities. As long as the
fundamental conditions remain positive
with low rates and rising real estate
prices, we continue to like the European
RMBS and CMBS markets.
Market Summary
In October, yields in developed markets
rose and yield curves steepened.1 The
dollar strengthened versus global
currencies, as the market priced in the
odds of a Fed rate hike in 2016.
Over the month, 10-year U.S. Treasury
yields rose 23 bps, while the 2s/10s curve
steepened by 15 bps.2 Germany’s 10-year
yield increased 28 bps, while the two-year
yield increased 7 bps.3 10-year yields in
Spain increased 32 bps, while increasing
political risks around the constitutional
referendum led Italian yields to increase
by 48 bps.4 Portugal’s 10-year yield
decreased 1 bp, and Greece’s 10-year
government yields increased 1 bp.5
Japanese government bond (JGB) 10-year
yield increased by 4 bps.6
The dollar strengthened against most
G10 currencies. The euro depreciated
by 2.3 percent. The British pound
depreciated by 5.6 percent, driven by
fears of a harder Brexit negotiation than
previously anticipated, making the pound
the biggest loser of the month. The
Japanese yen depreciated by 3.3 percent
for the month.7 Crude oil (Brent) prices
decreased in the month from $49 to $47.8
Developed Markets
In the U.S., the Federal Open Market
Committee released minutes to the
September meeting. Several policymakers
thought a rate increase relatively soon
Source: Bloomberg. Data as of October 31, 2016.
Source: Bloomberg. Data as of October 31, 2016.
3
Source: Bloomberg. Data as of October 31, 2016.
4
Source: Bloomberg. Data as of October 31, 2016.
DISPLAY 1
Asset Performance Year-to-Date
Returns through 10/31/2016
Brent crude oil
Gold
GSCI soft commodities
JPM Local EM Debt
ML US HY
JPY vs. USD
JPM External EM Debt
MSCI emerging equities
UK 10yr gov. bonds
S&P/LSTA Leveraged Loan Index
Barcap US IG Corp
ML Euro HY Constrained
Spain 10yr gov. bonds
German 10y Bund
US S&P 500
US 10 year Treasury
Barcap Euro IG Corp
MSCI developed equities
Japan 10yr gov. bonds
ML US Mortgage Master
Copper
Italy 10yr gov. bonds
EUR vs. USD
Dollar index
Euro Stoxx (USD)
Euro Stoxx (Euro)
Japan Nikkei 225
-0.2
-1.9
-3.0
-6.8
-20% -10%
0%
20.4
19.8
16.1
15.7
14.5
13.4
12.3
9.0
8.6
8.3
8.2
8.1
6.1
5.9
5.5
5.2
4.0
3.6
3.4
2.9
1.2
1.1
10%
20%
29.6
30%
40%
Note: U.S. dollar-based performance. Source: Thomson Reuters Datastream. Data as of October
31, 2016. The indexes are provided for illustrative purposes only and are not meant to depict the
performance of a specific investment. Past performance is no guarantee of future results. See
page 14 for index definitions.
would be warranted. The decision to not
hike in September was described as “a
close call.” Data was relatively good in
October. September nonfarm payrolls
increased 156,000 versus expectations
of 172,000, although August nonfarm
payrolls were revised higher to 167,000
from 151,000.9 The unemployment rate
ticked up to 5.0 percent, above consensus
of 4.9 percent, as the participation
rate increased to 62.9 percent. Average
hourly earnings rose 2.6 percent.10 ISM
manufacturing index increased to 51.5 in
September, above expectations of 50.4.
Gross domestic product (GDP) figures
for third quarter came out at 2.9 percent
quarter-on-quarter, above consensus
expectations of 2.6 percent. Headline CPI
rose to 1.5 percent from 1.1 percent, and
core CPI was 2.2 percent for September.11
Source: Bloomberg. Data as of October 31, 2016.
Source: Bloomberg. Data as of October 31, 2016.
7
Source: Bloomberg. Data as of October 31, 2016.
8
Source: Bloomberg. Data as of October 31, 2016.
In the eurozone, the ECB left policy
unchanged at the October meeting.
ECB President Mario Draghi again did
Source: Bloomberg. Data as of October 31, 2016.
Source: Bloomberg. Data as of October 31, 2016.
11
Source: Bloomberg. Data as of October 31, 2016.
1
5
9
2
6
10
The views and opinions expressed are those of the portfolio management team as of November 2016, and are subject to change based on
market, economic, and other conditions. Past performance is not indicative of future results.
4
MORGAN STANLEY INVESTMENT MANAGEMENT | FIXED INCOME
PASSING THE BATON TO FISCAL POLICY
not discuss possible extension of the
quantitative easing (QE) program and
communicated that the Council will
wait for results of ongoing review before
a full decision is made. Also in October,
DBRS confirmed Portugal’s IG rating
with a stable outlook, which ensures
Portugal’s eligibility for QE sovereign
purchases. In terms of survey data,
eurozone manufacturing PMI came in
at 52.6 in September, no change from
August and in line with consensus.12
Eurozone GDP for third-quarter 2016
was 0.3 percent quarter-on-quarter, in
line with consensus. Eurozone inflation
was 0.4 percent for September, up from
0.2 percent previously.13
In the U.K., the new Chancellor Phillip
Hammond presented a new fiscal plan.
Deficit reduction will be slowed compared
to the previous plan of delivering a surplus
by 2019-2020. Instead, public investment
spending will increase. Current Governor
Mark Carney has chosen to stay until
June 2019 in his position, an extension of
one year. In terms of data, headline CPI
inflation was 1.0 percent year over year
(YOY) in September, up from August
and above consensus of 0.9 percent.14
The unemployment rate’s three-month
average stayed at 4.9 percent in August.
GDP figures for the third quarter
was 0.5 percent quarter-on-quarter,
above consensus of 0.3 percent. U.K.
manufacturing PMI was 55.4 percent in
September, up from 53.4 in August and up
from consensus expectation of 52.1.15
In Japan, the BoJ continues to target
purchases around the yield curve.
Plans show that it reduced purchases
in the long and super-long end of the
curve for October. On the data front,
manufacturing PMI was 51.7 for
October, up from 50.4 in September. The
September core national CPI (ex-Food
& Energy) was flat, down from 0.2 in
August and 0.1 below the consensus.16
12
13
Source: Bloomberg. Data as of October 31, 2016.
Source: Bloomberg. Data as of October 31, 2016.
DISPLAY 2
Government Bond Yields for Major Economies
2YR
YIELD
LEVEL (%)
MONTH
CHANGE
(BPS)
5YR
YIELD
LEVEL (%)
MONTH
CHANGE
(BPS)
10YR
YIELD
LEVEL (%)
MONTH
CHANGE
(BPS)
Australia
1.64
9
1.95
35
2.35
44
Belgium
-0.63
1
-0.31
16
0.40
26
Canada
0.55
3
0.69
7
1.20
20
Denmark
-0.45
9
-0.19
17
0.29
28
France
-0.59
5
-0.27
16
0.47
28
Germany
-0.62
7
-0.40
18
0.16
28
Ireland
-0.46
-47
-0.08
16
0.65
32
Italy
0.00
11
0.65
38
1.66
48
Japan
-0.24
5
-0.19
6
-0.05
4
Netherlands
-0.61
5
-0.31
16
0.28
27
New Zealand
2.00
11
2.19
25
2.71
44
Norway
0.61
-33
0.75
-35
1.39
18
Portugal
0.36
-4
1.86
-5
3.32
-1
Spain
-0.17
5
0.18
13
1.20
32
Sweden
-0.74
-7
-0.34
3
0.26
9
Switzerland
-0.89
4
-0.75
9
-0.39
15
United Kingdom
0.26
16
0.59
37
1.25
50
United States
0.84
8
1.31
16
1.83
23
COUNTRY
Source: Bloomberg LP. Data as of October 31, 2016.
Emerging Markets
EM fixed income assets posted negative
performance in the month, as investors’
worries of potential inflation and the
prospect for a U.S. Fed interest rate hike
drove U.S. Treasury yields higher. Adding
to the lack of clarity for the direction of
interest rates were statements by central
bank leaders voicing their concerns
about the waning power of monetary
policy and their calls for fiscal policy to
aid the economic recovery. IG assets,
which typically exhibit longer duration
14
15
Source: Bloomberg. Data as of October 31, 2016.
Source: Bloomberg. Data as of October 31, 2016.
and greater sensitivity to UST yields,
suffered the most, while higher-yielding,
lower-rated assets outperformed. Investors
continued to favor dollar-denominated
assets but added broadly to EM fixed
income. The asset class received $7 billion
of inflows over the month, bringing the
year-to-date total to $55.9 billion.17
The receptiveness of investors and the
need for funding encouraged Saudi
Arabia to come to international debt
markets for the first time. The Kingdom
16
17
Source: Bloomberg. Data as of October 31, 2016.
Source: JP Morgan. Data as of October 30, 2016
The views and opinions expressed are those of the portfolio management team as of November 2016, and are subject to change based on
market, economic, and other conditions. Past performance is not indicative of future results.
FIXED INCOME | MORGAN STANLEY INVESTMENT MANAGEMENT
5
GLOBAL FIXED INCOME BULLETIN
were filed before being dropped; however,
prosecutors are still investigating allegations
regarding his previous oversight of a tax
agency. FM Gordhan has received broad
public support from civil-rights groups,
heads of companies and members of the
ruling African National Congress. In
Thailand, the primary market driver was
the passing of King Bhumibol, who ruled
the country for 70 years. The markets
will be watching for a smooth transition
as Crown Prince Maha Vajiralongkorn
ascends to the throne after an “appropriate
grieving period.”
DISPLAY 3
Currency Monthly Changes versus U.S. Dollar
Currency Monthly Change vs. USD (+ = appreciation)
Mexico
Brazil
South Africa
Chile
Indonesia
Australia
Russia
Malaysia
Switzerland
New Zealand
Singapore
Canada
Euro
Hungary
Poland
Japan
Norway
South Korea
Colombia
Sweden
UK
-8
-5.1
-5.6
-6
-3.3
-3.3
-3.7
-4.2
-1.7
-1.8
-1.9
-2.0
-2.1
-2.3
-2.3
-2.5
-4
0.0
-0.7
-0.8
-2
0
0.9
2.1
1.8
2
2.8
4
% Change
Source: Bloomberg LP. Data as of October 31, 2016. Note: Positive change means appreciation of the
currency against the U.S. dollar.
successfully placed $17.5Bn across several
tenors, bringing the overall Gulf debt
issuance to $39Bn year-to-date.18 The
government of Argentina continued to
tap international debt markets, issuing
euro-denominated and local currency
bonds as they worked to build out their
yield curves. Petroleos de Venezuela SA
(PDVSA), the Venezuelan state-owned
oil company, reached an agreement with
creditors to extend maturities on $2.8
billion of bonds, using equity in Citgo
Petroleum Corp. as collateral. The deal
provided the country breathing room for
payments due in 2017 but did not address
medium-term liquidity challenges.
The Venezuelan economy continued to
face steep challenges and the political
opposition repeated calls for a nationwide
18
19
Source: Bloomberg. Data as of October 30, 2016.
Source: JP Morgan. Data as of October 30, 2016.
strike and a march on the presidential
palace in a bid to force a recall
referendum of President Nicolas Maduro.
Political developments also drove asset
prices in Colombia and South Africa
during the period. Colombia’s surprise
vote against a peace deal with FARC rebels
put into question the ability of President
Santos to spend political capital for fiscal
reforms. The government must now
return to the negotiating table to achieve
a peace agreement that will gather a wider
consensus. In addition, the country must
continue its fiscal consolidation to avoid
losing its IG credit rating. In South Africa,
Finance Minister (FM) Gordhan continued
to be a political target of President Jacob
Zuma, who is trying to consolidate his
power. Fraud charges against the FM
20
21
External
EM external sovereign and quasisovereign debt returned -1.46 percent
in the month, bringing year-to-date
performance to 13.35 percent, as
measured by the JP Morgan EMBI
Global Index.19 Overall, lower-rated,
higher-yielding bonds outpaced IG
bonds, led by Ecuador, Ghana, Pakistan,
Ukraine and Mongolia. Bonds from
Venezuela, Dominican Republic,
Colombia, the Philippines, Uruguay,
Egypt and Peru underperformed during
the month, as investors took profit on
year-to-date outperformers and trimmed
exposure to smaller credits and duration.
Domestic
EM domestic debt returned -0.85
percent in the month, bringing yearto-date performance to 16.08 percent,
as measured by the JP Morgan GBIEM Global Diversified Index.20 EM
currencies weakened -0.54 percent versus
the U.S. dollar, and EM bonds returned
-0.30 percent in local terms.21 Currency
performance versus the U.S. dollar
weighed heavily on bond performance
for Colombia, Romania, Turkey, Poland,
Hungary and Malaysia, while assets in
Brazil, South Africa, Mexico, Peru and
Chile outperformed the broader market
in the period.
Source: JP Morgan. Data as of October 30, 2016.
Source: JP Morgan. Data as of October 30, 2016.
The views and opinions expressed are those of the portfolio management team as of November 2016, and are subject to change based on
market, economic, and other conditions. Past performance is not indicative of future results.
6
MORGAN STANLEY INVESTMENT MANAGEMENT | FIXED INCOME
PASSING THE BATON TO FISCAL POLICY
Corporate
EM corporate debt returned -0.01
percent in the month, bringing year-todate performance to 11.10 percent, as
measured by the JP Morgan CEMBI
Broad Diversified Index.22 Higheryielding, lower-quality companies
outperformed higher-rated companies.
From a regional perspective, companies
in Africa (Nigeria) and Latin America
(Brazil, Jamaica) outperformed, while
those in the Middle East (Israel), Asia
(S. Korea, China, Hong Kong, and
Thailand) and Europe (Czech Republic,
Russia) underperformed. From a sector
perspective, companies in the Metals
& Mining, Transport, Infrastructure
and Industrial sectors outperformed
the broader market, while those in the
Consumer, Real Estate, Diversified and
Utilities sectors lagged.
Corporate Credit
Returns for bonds were negative in
October due to a significant increase in
global long-term interest rates. Despite
this, a confluence of higher oil prices,
hawkish Fed speakers, surprisingly good
U.K. economic data, and higher inflation
expectations in the eurozone, U.K., and
U.S. supported global credit markets
and pushed the asset class tighter over
the month. Global credit continued to
perform well in October, higher-beta
credit outperformed lower-beta credit,
new issue markets remained active and
demand for credit risk remained robust.
U.S. IG credit again outperformed
European IG credit in October, as higher
U.S. rates continued to attract foreign
buyers. European high-yield markets
outperformed U.S. high-yield markets
over the month. We remain cautiously
optimistic on global credit, despite
political uncertainties, rising rates and
Source: JP Morgan. Data as of October 30, 2016.
Source: Bloomberg Barclays. Data as of
October 31, 2016.
24
Source: Bloomberg Barclays. Data as of
October 31, 2016.
22
23
DISPLAY 4
EM External and Local Spread Changes
USD SPREAD
(BPS)
MTD CHANGE
(BPS)
INDEX LOCAL
YIELD (%)
MTD CHANGE
(BPS)
Brazil
316
-8
11.0
-18
Colombia
237
16
7.1
27
Hungary
152
-3
2.0
3
Indonesia
232
3
7.4
29
Malaysia
192
-3
3.6
11
Mexico
293
-1
6.4
21
Peru
155
1
5.8
13
Philippines
111
9
4.7
19
Poland
85
-7
2.6
16
Russia
225
6
8.5
35
South Africa
282
-9
9.1
4
Turkey
327
5
9.7
43
2316
263
–
–
COUNTRY
Venezuela
Source: JP Morgan. Data as of October 31, 2016.
the potential for rate volatility, and
deteriorating credit fundamentals. As
investors continue to hunt for yield, we
continue to believe the technical picture
outweighs the aforementioned risks.
The U.S. credit market ended the
month 5 bps tighter at 125 bps.23 The
outperformance of financials over
industrials in October within the U.S. IG
market was significant, as it represents a
reversal of the trend we have seen yearto-date in 2016. On a year-to-date basis,
industrials have outperformed financials
from an excess returns standpoint (4.59%
versus 1.75%, respectively).24 In contrast,
financials outperformed industrials in
October, as financials posted 64 bps in
excess returns while industrials posted
Source: Bloomberg Barclays. Data as of
October 31, 2016.
26
Source: Bloomberg Barclays. Data as of
September 30, 2016.
27
Source: BAML. Data as of October 31, 2016.
25
49 bps.25 In October, higher-beta sectors
and sectors benefiting from higher interest
rates outperformed on an excess returns
basis, including lower tier 2 financials,
life insurance and energy (1.39%, 1.88%
and 1.55%, respectively).26 The worst
performing sectors were telecom (-43 bps)
and tobacco (-14 bps) due to M&A deal
announcements.27 Within the U.S. IG
market, BBB-rated credit outperformed
A-rated credit as the global hunt for yield
continued during the month (0.64%
excess returns versus 0.36% excess returns,
respectively).28 High-grade new issue
supply diminished from $112 billion in
August and $144 billion in September
to $101 billion in October.29 Consensus
estimates point to further deceleration
in issuance in November, with total
Source: Bloomberg Barclays. Data as of
October 31, 2016.
29
Source: BAML. Data as of September 30, 2016.
28
The views and opinions expressed are those of the portfolio management team as of November 2016, and are subject to change based on
market, economic, and other conditions. Past performance is not indicative of future results.
FIXED INCOME | MORGAN STANLEY INVESTMENT MANAGEMENT
7
GLOBAL FIXED INCOME BULLETIN
issuance expected to be in the $70-$90
billion range.30 A slowdown in November
is atypical as companies come out of
blackout periods; however, front-loaded
third-quarter supply, a smaller M&A
backlog and U.S. election uncertainty all
have the potential to mute supply. The
performance of new issues in October was
weaker relative to previous months, as
concessions in October increased to 8 bps
from 1 bp in September.31 Non-financials
continued to dominate supply in October
as financials issued $46 billion while nonfinancials priced $55 billion.32
Similar to the U.S., the European
IG credit market traded tighter over
the month of October. European IG
ended the month 5 bps tighter.33 On
an excess returns basis, European IG
underperformed U.S. IG over the month
(45 bps versus 56 bps, respectively), which
mirrors the trend we have seen year-todate in 2016. European IG has posted
2.9% in excess returns year-to-date 2016,
while U.S. IG has generated 3.62% in
excess returns.34 This outperformance
is largely attributable to higher rates in
the U.S., and the consequent technical
support afforded by foreign buyers
infiltrating the U.S. IG market. Similar
to the U.S. IG market, we saw financials
outperform industrials in October
in Europe, reversing the year-to-date
trend between these two sub-sectors. In
Europe, financials posted 60 bps of excess
returns in October, while industrials
generated 33 bps of excess returns.35
On a year-to-date basis, European
industrials have outperformed financials
with excess returns of 3.5% versus
2.17%, respectively.36 Euro-denominated
corporate issuance surprised to the
upside, pricing 46.8 billion euros in
October.37
Source: BAML. Data as of September 30, 2016.
Source: BAML. Data as of September 30, 2016.
32
Source: BAML. Data as of September 30, 2016.
33
Source: Bloomberg Barclays. Data as of
October 31, 2016.
30
31
DISPLAY 5
Credit Sector Changes
USD
SPREAD
LEVEL (BPS)
MONTH
CHANGE
(BPS)
EUR
SPREAD
LEVEL (BPS)
MONTH
CHANGE
(BPS)
Index Level
132
-6
109
-6
Industrial Basic Industry
176
-11
102
-10
Industrial Capital Goods
102
-4
79
-3
Industrial Consumer Cyclicals
121
-3
99
-6
Industrial Consumer Non Cyclicals
115
-1
85
-4
Industrial Energy
173
-17
109
-5
Industrial Technology
118
-6
70
-4
Industrial Transportation
121
-6
86
-4
Industrial Communications
162
+1
109
-2
Industrial Other
116
-4
136
-9
Utility Electric
124
-7
101
-5
Utility Natural Gas
135
-6
93
-5
Utility Other
160
+7
82
-5
Financial Inst. Banking
122
-7
109
-8
Financial Inst. Brokerage
144
-7
115
+0
Financial Inst. Finance Companies
159
-6
89
-3
Financial Inst. Insurance
142
-9
251
-18
Financial Inst. REITS
148
-8
114
-2
Financial Inst. Other
164
-67
147
-13
SECTOR
Source: Bloomberg Barclays. Data as of October 31, 2016. The indexes are provided for illustrative
purposes only and are not meant to depict the performance of a specific investment.
The U.S. high-yield market produced
total returns of 0.39% in October, and
excess returns of 0.92%.38 Lower-rated
high-yield bonds outperformed as Barated bonds gained +19 bps, B-rated
bonds gained +24 bps, and Caa-rated
credit was up 1.11%.39 The best-
performing sectors were oil field services
(4.34%), independent (2.2%) and metals
(1.1%) given their high-beta nature
and commodity exposure. The worstperforming sectors were pharmaceuticals
(-4.4%) and healthcare (-1.07%), as
election jitters and idiosyncratic headlines
Source: Bloomberg Barclays. Data as of
October 31, 2016.
35
Source: Bloomberg Barclays. Data as of
October 31, 2016.
36
Source: Bloomberg Barclays. Data as of
October 31, 2016.
37
34
Source: Bloomberg Barclays. Data as of
October 31, 2016.
38
Source: Bloomberg Barclays. Data as of
October 31, 2016.
39
Source: Bloomberg Barclays. Data as of
October 31, 2016.
The views and opinions expressed are those of the portfolio management team as of November 2016, and are subject to change based on
market, economic, and other conditions. Past performance is not indicative of future results.
8
MORGAN STANLEY INVESTMENT MANAGEMENT | FIXED INCOME
PASSING THE BATON TO FISCAL POLICY
weighed on both of these sub sectors.
U.S. high-yield bond issuance hit an
eight-month low in October, as the
market priced $16.6 billion in October.40
Since May, 60% of total primary issuance
has been used for refinancing of existing
debt ($75Bn), and net-new issuance
remains low ($50Bn).41
The European high-yield market
produced 0.85% in total returns in
October.42 The best-performing sectors
in October were transportation services
and healthcare (2.18% and 1.85%,
respectively).43 The worst performing
sectors were supermarkets (-0.37%)
and wirelines (0.13%).44 The European
high-yield market priced 4.6Bn euros in
October, all in European currencies.45
European issuers continue to take
advantage of the favorable borrowing
environment, as they persist in pushing
out their maturity walls.
Securitized Products
After a very strong third-quarter
performance, mortgage credit markets
were more moderately positive in October,
while more rates-sensitive agency MBS
were also moderately positive during
the month. Agency MBS outperformed
their duration equivalent U.S. Treasuries
with nominal spreads on current
coupon MBS tightening 1-97 bps above
interpolated Treasuries.46 Option-adjusted
spreads (OAS) tightened 2-4 bps over
interpolated Treasuries. The Bloomberg
Barclays Capital U.S. MBS Index was
down 0.28 percent in October as interest
rates rose during the month, but the
Index has still returned 3.46 percent
Source: JPMorgan. Data as of October 31, 2016.
Source: JPMorgan. Data as of September 30, 2016.
42
Source: Bloomberg Barclays. Data as of
October 31, 2016.
43
Source: Bloomberg Barclays. Data as of
October 31, 2016.
44
Source: Bloomberg Barclays. Data as of
October 31, 2016.
45
Source: Bloomberg Barclays. Data as of
October 31, 2016.
year-to-date.47 The Fed increased their
agency MBS purchases this month to
roughly $40 billion to compensate for the
recent increase in prepayments. The Fed
continues to maintain their agency MBS
portfolio at approximately $1.75 trillion.48
Non-agency MBS spreads were largely
unchanged in October, but cash flow and
credit performance continue to improve.
Non-agency MBS spreads remain at
their tightest levels since 2014 for most
securities. Fundamental U.S. housing
market and mortgage market conditions
remain positive. National home prices
were up 0.5 percent in August and are up
5.3 percent over the past year.49 Home
prices are up 38 percent nationally from
the lows in 2012 and are now essentially
back to pre-crisis peak levels from July
2006. Existing home sales rose 3.2 percent
in September from August and were up
0.6 percent from September 2015.50 The
sharp increase in home sales this month
was driven primarily by a surge in firsttime home buyers who accounted for
34 percent of purchases, the highest level
since 2012. New home sales increased a
similar 3.1 percent in September from
August and are up 29.8 percent from
September 2015.51 Mortgage performance
also remains strong. New defaults were
essentially unchanged at a 0.67 percent
annual rate in September, but defaults
are down from the 0.76 percent level in
September 2015.52 With unemployment
low, the economy slowly improving and
home prices still recovering from the
mortgage crisis almost 10 years ago, we
expect mortgage credit performance to
continue to improve.
Source: Yield Book. Data as of October 31, 2016.
Source: Bloomberg Barclays. Data as of
October 31, 2016.
48
Source: Federal Reserve Bank of New York.
Data as of October 31, 2016.
49
Source: S&P Case-Shiller U.S. National Home
Price Index. Data as of October 31, 2016.
50
Source: National Association of Realtors. Data
as of October 31, 2016.
51
Source: US Census Bureau and HUD. Data as
of October 31, 2016.
40
46
41
47
CMBS spreads were mixed in October,
with cash AAA CMBS 1-2 bps wider and
cash BBB CMBS 5-15 bps wider, while
synthetic CMBX were slightly tighter for
both AAA and BBB indexes. Year-to-date
in 2016, CMBS performance has sharply
diverged based on position in the capital
structure, with AAA rated CMBS 2530 bps tighter, while BBB are 50-75 bps
wider for the year.53 New CMBS issuance
increased in October, with roughly
$10 billion in total issuance during the
month. Year-to-date issuance is roughly
$57 billion issued through the first
10 months of the year. We are on pace
for $70-75 billion in issuance in 2016,
which would be about 70 percent of the
issuance that was initially anticipated
for the year.54 Fundamentally, CMBS
performance remains on solid ground.
Commercial real estate prices were flat
in September but are up 5.0 percent
over the past 12 months. After several
years of 10+ percent annual increases,
the pace of commercial real estate price
increases is slowing, but the trajectory
remains positive. Commercial real estate
prices are 26.5 percent above the previous
peak in August 2007.55 National office
vacancy rates decreased to 13.0 percent
in Q2 2016, the lowest level seen since
Q1 2008.56 Multifamily vacancy rates
decreased in Q2 2016 and are very
near the lowest levels seen over the past
13 years.57 While price volatility and
supply-demand dynamics for CMBS
continue to cause some concerns,
the fundamental real estate market
conditions underlying CMBS market
appear to be stable.
Source: S&P/Experian First Mortgage Default
Index. Data as of October 31, 2016.
53
Source: Bloomberg Barclays. Data as of
October 31, 2016.
54
Source: Deutsche Bank . Data as of
October 31, 2016.
55
Source: Green Street. Data as of October 31, 2016.
56
Source: CBRE. Data as of October 31, 2016.
57
Source: US Census Bureau and National Association
of Home Builders. Data as of October 31, 2016.
52
The views and opinions expressed are those of the portfolio management team as of November 2016, and are subject to change based on
market, economic, and other conditions. Past performance is not indicative of future results.
FIXED INCOME | MORGAN STANLEY INVESTMENT MANAGEMENT
9
GLOBAL FIXED INCOME BULLETIN
European MBS spreads were 5-10 bps
tighter in October and are now
meaningfully tighter than pre-Brexit
levels.58 ECB-eligible ABS were roughly
5 bps tighter in spread in October and are
20-30 bps tighter in 2016, while nonECB-eligible assets were only 2-3 bps
tighter in October and 10-15 bps tighter
on the year. ECB ABS purchases remain
slow due to limited supply, and the ECB
portfolio increased by only €520 million
European ABS in September. The ECB
holds €20.7 billion of European ABS.59
European ABS issuance increased in
October, with roughly €12.3 billion in
new securitizations during the month.
2016 year-to-date securitization issuance
totals €74.5B, now ahead of the 2015
pace of €66.4 billion through October
2015.60 RMBS, ABS and CDO issuance
are all ahead of 2015 volumes, while
CMBS issuance has been much lower
this year.
Source: Deutsche Bank . Data as of
October 31, 2016.
59
Source: European Central Bank. Data as of
October 31, 2016.
60
58
This material is for use of Professional Clients only, except in
the U.S. where the material may be redistributed or used with
the general public.
The views and opinions are those of the author as of the date of
publication and are subject to change at any time, due to market
or economic conditions, and may not necessarily come to pass.
Furthermore, the views will not be updated or otherwise revised
to reflect information that subsequently becomes available or
circumstances existing, or changes occurring, after the date of
publication. The views expressed do not reflect the opinions of all
Portfolio Managers at Morgan Stanley Investment Management
or the views of the firm as a whole, and may not be reflected in all
the strategies and products that the firm offers.
Forecasts and/or estimates provided herein are subject to change
and may not actually come to pass. Information regarding expected
market returns and market outlooks is based on the research, analysis
and opinions of the authors. These conclusions are speculative in
nature, may not come to pass and are not intended to predict the
future performance of any specific Morgan Stanley Investment
Management product.
Certain information herein is based on data obtained from party
sources believed to be reliable. However, we have not verified this
information, and we make no representations whatsoever as to its
accuracy or completeness.
All information provided has been prepared solely for information
purposes and does not constitute an offer or a recommendation
to buy or sell any particular security or to adopt any specific
investment strategy. The information herein has not been based
on a consideration of any individual investor circumstances and is
not investment advice, nor should it be construed in any way as
tax, accounting, legal or regulatory advice. To that end, investors
should seek independent legal and financial advice, including advice
as to tax consequences, before making any investment decision.
There is no assurance that a portfolio will achieve its investment
objective. Portfolios are subject to market risk, which is the possibility
that the market values of securities owned by the portfolio will
decline. Accordingly, you can lose money investing in a fixed income
portfolio. Please be aware that a fixed income portfolio may be
subject to certain additional risks.
Fixed income securities are subject to the ability of an issuer to
make timely principal and interest payments (credit risk), changes
in interest rates (interest rate risk), the creditworthiness of the
Source: Deutsche Bank . Data as of
October 31, 2016.
issuer and general market liquidity (market risk). In the current
rising-interest-rate environment, bond prices may fall and may
result in periods of volatility and increased portfolio redemptions.
Longer-term securities may be more sensitive to interest rate
changes. In a declining interest rate environment, the portfolio may
generate less income.
Certain U.S. government securities purchased by the Strategy, such
as those issued by Fannie Mae and Freddie Mac, are not backed by
the full faith and credit of the U.S. It is possible that these issuers will
not have the funds to meet their payment obligations in the future.
Public bank loans are subject to liquidity risk and the credit risks
of lower-rated securities.
High-yield securities (“junk bonds”) are lower-rated securities that
may have a higher degree of credit and liquidity risk.
Sovereign debt securities are subject to default risk.
Mortgage- and asset-backed securities are sensitive to early
prepayment risk and a higher risk of default and may be hard to
value and difficult to sell (liquidity risk). They are also subject to
credit, market and interest rate risks.
The currency market is highly volatile. Prices in these markets are
influenced by, among other things, changing supply and demand for
a particular currency; trade; fiscal, money and domestic or foreign
exchange control programs and policies; and changes in domestic
and foreign interest rates.
Investments in foreign markets entail special risks such as currency,
political, economic and market risks. The risks of investing in emerging
market countries are greater than the risks generally associated
with foreign investments.
Derivative instruments may disproportionately increase losses and
have a significant impact on performance. They also may be subject
to counterparty, liquidity, valuation, correlation and market risks.
Restricted and illiquid securities may be more difficult to sell and
value than publicly traded securities (liquidity risk).
Due to the possibility that prepayments will alter the cash flows
on Collateralized mortgage obligations (CMOs), it is not possible
to determine in advance their final maturity date or average life.
In addition, if the collateral securing the CMOs or any third-party
guarantees are insufficient to make payments, the portfolio could
sustain a loss.
The views and opinions expressed are those of the portfolio management team as of November 2016, and are subject to change based on
market, economic, and other conditions. Past performance is not indicative of future results.
10
MORGAN STANLEY INVESTMENT MANAGEMENT | FIXED INCOME
PASSING THE BATON TO FISCAL POLICY
Charts and graphs provided herein are for illustrative purposes only.
Past performance is no guarantee of future results.
Any index referred to herein is the intellectual property (including
registered trademarks) of the applicable licensor. Any product based
on an index is in no way sponsored, endorsed, sold or promoted
by the applicable licensor and it shall not have any liability with
respect thereto.
INDEX DEFINITIONS
The indexes shown in this report are not meant to depict the
performance of any specific investment and the indexes shown do
not include any expenses, fees or sales charges, which would lower
performance. The indexes shown are unmanaged and should not
be considered an investment. It is not possible to invest directly
in an index.
The National Association of Realtors Home Affordability Index
compares the median income to the cost of the median home.
Purchasing Managers Index (PMI) is an indicator of the economic
health of the manufacturing sector.
Consumer Price Index (CPI) is a measure that examines the weighted
average of prices of a basket of consumer goods and services, such
as transportation, food and medical care.
The JP Morgan Emerging Markets Bond Index Global (EMBI
Global) tracks total returns for traded external debt instruments in
the emerging markets, and is an expanded version of the EMBI+. As
with the EMBI+, the EMBI Global includes U.S. dollar-denominated
Brady bonds, loans and eurobonds with an outstanding face value
of at least $500 million.
The JP Morgan CEMBI Broad Diversified Index is a global, liquid
corporate emerging markets benchmark that tracks U.S.-denominated
corporate bonds issued by emerging markets entities.
The JP Morgan GBI-EM Global Diversified Index is a market
capitalization weighted, liquid global benchmark for U.S.-dollar
corporate emerging market bonds representing Asia, Latin America,
Europe and the Middle East/Africa.
The ISM Manufacturing Index is based on surveys of more than
300 manufacturing firms by the Institute of Supply Management.
The ISM Manufacturing Index monitors employment, production
inventories, new orders and supplier deliveries. A composite diffusion
index is created that monitors conditions in national manufacturing
based on the data from these surveys.
The Bloomberg Barclays U.S. Mortgage Backed Securities (MBS)
Index tracks agency mortgage backed pass-through securities (both
fixed-rate and hybrid ARM) guaranteed by Ginnie Mae (GNMA), Fannie
Mae (FNMA) and Freddie Mac (FHLMC). The index is constructed by
grouping individual TBA-deliverable MBS pools into aggregates or
generics based on program, coupon and vintage. Introduced in 1985,
the GNMA, FHLMC and FNMA fixed-rate indexes for 30- and 15-year
securities were backdated to January 1976, May 1977, and November
1982, respectively. In April 2007, agency hybrid adjustable-rate
mortgage (ARM) pass-through securities were added to the index.
The Nikkei 225 Index (Japan Nikkei 225) is a price-weighted index of
Japan’s top 225 blue-chip companies on the Tokyo Stock Exchange.
The U.S. Dollar Index (DXY) is an index of the value of the United
States dollar relative to a basket of foreign currencies, often referred
to as a basket of U.S. trade partners’ currencies. Italy 10YR govt
bonds—Italy Benchmark 10-Year Datastream Government Index.
The MSCI World Index (MSCI developed equities) captures large
and mid-cap representation across 23 Developed Markets (DM)
countries. Spain 10YR govt bonds—Spain Benchmark 10-Year
Datastream Government Index. The BofA Merrill Lynch European
Currency High-Yield Constrained Index (ML Euro HY constrained)
is designed to track the performance of euro- and British pound
sterling-denominated below investment-grade corporate debt
publicly issued in the eurobond, sterling domestic or euro domestic
markets by issuers around the world. The S&P 500® Index (U.S.
S&P 500) measures the performance of the large cap segment of
the U.S. equities market, covering approximately 75 percent of the
U.S. equities market. The Index includes 500 leading companies in
leading industries of the U.S. economy. The JPMorgan Government
Bond Index Emerging Markets (JPM External EM Debt) tracks local
currency bonds issued by Emerging Market governments. The Index
is positioned as the investable benchmark that includes only those
countries that are accessible by most of the international investor
base (excludes China and India as of September 2013). UK 10YR govt
bonds—UK Benchmark 10-Year Datastream Government Index. For
the following Datastream government bond indexes, benchmark
indexes are based on single bonds. The bond chosen for each series
is the most representative bond available for the given maturity
band at each point in time. Benchmarks are selected according
to the accepted conventions within each market. Generally, the
benchmark bond is the latest issue within the given maturity band;
consideration is also given to yield, liquidity, issue size and coupon.
German 10YR bunds—Germany Benchmark 10-Year Datastream
Government Index; Japan 10YR govt bonds—Japan Benchmark
10-Year Datastream Government Index; and 10YR U.S. Treasury—U.S.
Benchmark 10-Year Datastream Government Index.
The BofA Merrill Lynch U.S. Mortgage Backed Securities (ML
U.S. Mortgage Master) Index tracks the performance of U.S. dollar
denominated fixed rate and hybrid residential mortgage pass-through
securities publicly issued by U.S. agencies in the U.S. domestic
market. The S&P/LSTA U.S. Leveraged Loan 100 Index (S&P/LSTA
Leveraged Loan Index) is designed to reflect the performance of
the largest facilities in the leveraged loan market. The Bloomberg
Barclays Euro Aggregate Corporate Index (Barclays Euro IG
Corporate) is an index designed to reflect the performance of the
euro-denominated investment-grade corporate bond market. The
Bloomberg Barclays U.S. Corporate Index (Barclays U.S. IG Corp)
is a broad-based benchmark that measures the investment-grade,
fixed rate, taxable, corporate bond market. The Bank of America
Merrill Lynch United States High Yield Master II Constrained Index
(Merrill Lynch U.S. High Yield) is a market value-weighted index of
all domestic and Yankee high-yield bonds, including deferred interest
bonds and payment-in-kind securities. Its securities have maturities
of one year or more and a credit rating lower than BBB-/Baa3, but
are not in default. JPY vs USD—Japanese Yen Total return versus
USD. Euro vs USD—Euro Total return versus USD. MSCI Emerging
Markets Index (MSCI emerging equities) captures large and mid-cap
representation across 23 Emerging Markets (EM) countries. The
MSCI AC Asia ex-Japan Index (MSCI Asia ex-Japan) captures large
and mid-cap representation across two of three Developed Markets
countries (excluding Japan) and eight Emerging Markets countries
in Asia. The S&P GSCI Softs (GSCI soft commodities) Index is a
sub-index of the S&P GSCI that measures the performance of only
the soft commodities, weighted on a world production basis. In
2012, the S&P GSCI Softs index included the following commodities:
coffee, sugar, cocoa and cotton. The Dow Jones Commodity Index
The views and opinions expressed are those of the portfolio management team as of November 2016, and are subject to change based on
market, economic, and other conditions. Past performance is not indicative of future results.
FIXED INCOME | MORGAN STANLEY INVESTMENT MANAGEMENT
11
Gold (Gold) is designed to track the gold market through futures
contracts. The JPMorgan Government Bond Index—Emerging
Markets (JPM local EM debt) tracks local currency bonds issued
by Emerging Market governments. The Index is positioned as the
investable benchmark that includes only those countries that are
accessible by most of the international investor base (Excludes
China and India as of September 2013. The ICE Brent Crude futures
contract (Brent crude oil) is a deliverable contract based on EFP
delivery with an option to cash settle. The S&P GSCI Copper Index
(Copper), a sub-index of the S&P GSCI, provides investors with a
reliable and publicly available benchmark for investment performance
in the copper commodity market.
This communication is only intended for and will be only distributed
to persons resident in jurisdictions where such distribution or
availability would not be contrary to local laws or regulations.
There is no guarantee that any investment strategy will work under
all market conditions, and each investor should evaluate their ability
to invest for the long term, especially during periods of downturn
in the market. Prior to investing, investors should carefully review
the strategy’s/product’s relevant offering document. There are
important differences in how the strategy is carried out in each of
the investment vehicles.
EMEA:
This communication was issued and approved in the United Kingdom
by Morgan Stanley Investment Management Limited, 25 Cabot Square,
Canary Wharf, London E14 4QA, authorized and regulated by the
Financial Conduct Authority, for distribution to Professional Clients
only and must not be relied upon or acted upon by Retail Clients
(each as defined in the U.K. Financial Conduct Authority’s rules).
Financial intermediaries are required to satisfy themselves that the
information in this document is suitable for any person to whom they
provide this document in view of that person’s circumstances and
purpose. Morgan Stanley Investment Management shall not be liable
for, and accepts no liability for, the use or misuse of this document
by any such financial intermediary. If such a person considers an
investment, he should always ensure that he has satisfied himself
that he has been properly advised by that financial intermediary
about the suitability of an investment.
U.S.:
A separately managed account may not be suitable for all investors.
Separate accounts managed according to the Strategy include a
number of securities and will not necessarily track the performance
of any index. Please consider the investment objectives, risks and
fees of the Strategy carefully before investing. A minimum asset
level is required. For important information about the investment
manager, please refer to Form ADV Part 2.
Morgan Stanley Distribution, Inc. serves as the distributor for
Morgan Stanley funds.
NOT FDIC INSURED | OFFER NOT BANK GUARANTEED | MAY
LOSE VALUE | NOT INSURED BY ANY FEDERAL GOVERNMENT
AGENCY | NOT A DEPOSIT
Hong Kong:
This document has been issued by Morgan Stanley Asia Limited for
use in Hong Kong and shall only be made available to “professional
investors” as defined under the Securities and Futures Ordinance
of Hong Kong (Cap 571). The contents of this document have not
been reviewed nor approved by any regulatory authority including
the Securities and Futures Commission in Hong Kong. Accordingly,
save where an exemption is available under the relevant law, this
document shall not be issued, circulated, distributed, directed at,
or made available to, the public in Hong Kong.
Singapore:
This document should not be considered to be the subject of an
invitation for subscription or purchase, whether directly or indirectly,
to the public or any member of the public in Singapore other than
(i) to an institutional investor under section 304 of the Securities
and Futures Act, Chapter 289 of Singapore (“SFA”), (ii) to a “relevant
person” (which includes an accredited investor) pursuant to section
305 of the SFA, and such distribution is in accordance with the conditions specified in section 305 of the SFA; or (iii) otherwise pursuant
to, and in accordance with the conditions of, any other applicable
provision of the SFA. In particular, for investment funds that are
not authorized or recognized by the MAS, units in such funds are
not allowed to be offered to the retail public; any written material
issued to persons as aforementioned in connection with an offer is
not a prospectus as defined in the SFA and, accordingly, statutory
liability under the SFA in relation to the content of prospectuses
does not apply, and investors should consider carefully whether
the investment is suitable for them.
Australia:
This publication is disseminated in Australia by Morgan Stanley
Investment Management (Australia) Pty Limited ACN: 122040037,
AFSL No. 314182, which accept responsibility for its contents. This
publication, and any access to it, is intended only for “wholesale
clients” within the meaning of the Australian Corporations Act.
Morgan Stanley Investment Management is the asset management
division of Morgan Stanley.
All information contained herein is proprietary and is protected
under copyright law.
Please consider the investment objectives, risks, charges and
expenses of the funds carefully before investing. The prospectuses
contain this and other information about the funds. To obtain
a prospectus, please download one at morganstanley.com/im
or call 1-800-548-7786. Please read the prospectus carefully
before investing.
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© 2016 Morgan Stanley. All rights reserved.
1637221 Exp. 11/08/2017 EMEA CRC N/A 8741336_KC_1116 Lit-Link: FIBULLETIN 11/16