PACIFIC ASSET MANAGEMENT, MARCH 2017

Informational commentary from Pacific Asset Management, the manager of Pacific FundsSM Fixed-Income Funds.

Relative value currently favors bank loans over high-yield bonds.

U.S. credit markets have benefited from the sharp improvement in market sentiment following the U.S. presidential election that took place in November 2016. Consumer and business sentiment in the U.S., as measured by the University of Michigan Consumer Sentiment Index, have reached 20-year highs in the U.S. on the hope that fiscal, tax, and regulatory reform will drive meaningfully higher growth rates. In particular, high-yield bonds have seen positive performance during this risk-on market environment. U.S. high-yield bond yields have moved lower by 1.00%, and option-adjusted spreads (OASs) have moved lower by 1.35% since November 8, 2016. The Bloomberg Barclays U.S. Corporate High-Yield Bond Index returned 4.73% during the same period.

 

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Source: Bloomberg Barclays, Credit Suisse, February 2017.

The outperformance of high-yield bonds has brought yields in line with floating-rate loans. Since 2010, high-yield bonds have averaged a yield 1.30% higher than floating-rate loans, given their lower position in the capital structure and greater downside risk, as shown in the chart above. With yields now near equivalency between the two asset classes, investors give up little income potential to move higher in the capital structure, which helps reduce downside risk and volatility in their portfolios. Combined with limited duration risk for floating-rate loans, we believe this provides a favorable relative value advantage for floating-rate loans over bonds in the near term. 

 


Definitions:

The Bloomberg Barclays U.S. Corporate High-Yield Bond Index measures USD-Denominated, high yield, fixed-rate corporate bond market. 

The Credit Suisse Leveraged Loan Index is designed to mirror the investable universe of the U.S. senior secure credit (leveraged loan) market.

Duration is a measure of sensitivity to interest rates. Securities floating or adjustable interest rates tend to be less sensitive to changes in interest rates, making them generally less volatile that debt securities with longer durations.

Effective yield is the yield of a bond, assuming the periodic interest payments or coupons received are reinvested.

Option-adjusted spread (OAS) is the measure of the spread of a fixed income security and the risk-free rate of return, which is adjusted to take into account an embedded option.

Yield to worst is the lowest potential yield that can be received on a bond without the issuer actually defaulting.

 

All investing involves risk including the possible loss of the principal amount invested. Past performance does not guarantee future results, ensure a profit or protect against loss.

This general market commentary represents the views of the portfolio managers at Pacific Asset Management as of 3/17/17, and is presented for informational purposes only. These views should not be construed as investment advice, an endorsement of any security, mutual fund, sector, or index, or to predict performance of any investment. Any forward-looking statements are not guaranteed. All material is compiled from sources believed to be reliable, but accuracy cannot be guaranteed. The opinions expressed herein are subject to change without notice as market and other conditions warrant. Sector names in this commentary are provided by the Fund’s portfolio managers and could be different if provided by a third party.


Definitions:

Easy money is a condition in the money supply that occurs when the Federal Reserve allows cash to build up in the banking system, which lowers interest rates and makes it easier for financial institutions to loan money.

Tailwind and headwind refers to conditions or situations that will help move growth higher, or will make growth more difficult, respectively.

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Pacific Life Fund Advisors LLC (PLFA), a wholly owned subsidiary of Pacific Life Insurance Company, is the investment adviser to the Pacific Funds. PLFA also does business under the name Pacific Asset Management and manages certain funds under that name.