LDI - A Statistical and Qualitative Review of Q3 2015 & Outlook

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Q3 2015 Commentary

Andrew Catalan, CFA

Andrew Catalan, CFA - Managing Director & Senior Portfolio Manager of the Liability Driven Investing group

“When you come to a fork in the road, take it.” -Yogi Berra

Background

We pay tribute to Yogi Berra this quarter with another of his Yogi-isms. The Fed did reach a fork in the road during its September 17/18th meeting. As to which road to take seemed a difficult choice for Janet Yellen and her lieutenants. In the end, despite an improving labor market, weak global conditions kept the Fed from initiating rate hikes. While a Fed Funds 0.25% rate hike does not directly impact rates across the curve, it does signal the Fed’s view on the economy and contributes to market volatility. Uncertainty and inaction does not help at a time when the market is in “risk-off” mode and various sectors are being re-priced. In fact, non-farm payroll data released for September shows some weakness in the labor market. Combine weak labor with a lack of inflation and the Fed may be on hold for just a bit longer. Prior to the decision, the market did not appear to believe a hike was imminent as reflected in Federal Funds Futures pricing.

Risky assets including spread product sold off markedly in Q3. In some cases, such as in the Metals & Mining sector, bond prices dropped to distressed levels. Volatility spiked during the quarter in both fixed income spreads and equity markets with dramatic swings during some days. Liquidity in the bond market clearly suffered and new issues, some at substantial discounts to secondary levels, found it difficult to hold their new issue price. Fragile markets were jolted in the early summer when Chinese exchange markets tumbled and again mid-August when China devalued its currency.

The slowing of China’s economy has reverberated through those economies and industries that were most dependent on this growth engine, namely other emerging market countries and Metals & Mining companies. China as a swing economic factor in an otherwise sluggish global economy will continue to be a focus for markets.

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