doubleline march 2015 commentary

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Quarterly Commentary

March 2015

333 S. Grand Ave., 18th Floor || Los Angeles, CA 90071 || (213) 633-8200

2

Quarterly Commentary 3/31/15

Overview

Central Bank policy remained a focus during the first

quarter of 2015 as market participants continued to

look for any signs of a rate hike in the U.S. As a result,

particular attention was given to the Federal Open

Market Committee (FOMC) minutes released during

March and as many expected, the word patient was

omitted when providing forward guidance. The move

is expected to provide the Fed with additional

flexibility. It is worth noting that several FOMC

members emphasized caution citing weaker growth

and lower inflation forecasts which were recently

downgraded beyond 2015.

Inflation remained another focal point during the first

quarter after several consecutive months of weak

commodity prices. Inflation as measured by the

Consumer Price Index (CPI) and Producer Price Index

(PPI) for Final Demand were mixed during March as

oil prices stabilized. The Personal Consumption

Expenditures (PCE) Deflator, a measure used by the

Fed to monitor a wide range of spending, was up just

0.3% year-over-year (YoY). Excluding food and energy,

the Core PCE was up 1.4% YoY, well short of the Feds

2% inflation mandate.

Growth expectations have also been on close watch

as the Bureau of Economic Analysis (BEA) released

their third estimate of gross domestic product (GDP)

for the fourth quarter of 2014. According to the BEA,

GDP expanded by 2.2% as exports and PCE drove

growth. For the full calendar year 2014, GDP grew

2.4%. According to the Conference Board, growth is

expected to increase at an annualized rate of 2.8%

during 2015.

One of the most disappointing figures for the quarter

came in the March nonfarm payrolls figure. According

to the Employment Situation Summary, total nonfarm

payrolls increased by 126,000 during March, marking

the lowest gain since December 2013. The figure also


included a downward revision totaling 69,000 as

nonfarm payrolls grew less than initially reported

during January and February.

The unemployment rate held steady at 5.5% while

the underemployment rate (U-6) fell to 10.9% from

11.0% during February. The Labor Force Participation

Rate fell to 62.7% from 62.8% the month prior.

0

50

100

150

200

250

300

350

400

450

Ne

t P

ayro

ll A

dd

itio

ns

(00

0's

)

Nonfarm Private Payrolls - Net Change

BLS

ADP

Source: Bureau of Labor Statistics, Bloomberg, ADP

Last BLS = 189KLast ADP = 126K

-10.00%

-8.00%

-6.00%

-4.00%

-2.00%

0.00%

2.00%

4.00%

6.00%

8.00% Quarter-over-Quarter Real GDP Growth Estimates

Advance

Second

Third

Latest

Source: Bureau of Economic Analysis, Bloomberg

2014Q4 Growth = 2.20%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

Underemployment/Unemployment RateUnemployment Rate

Underemployment Rate

Source: Bureau of Labor Statistics, Bloomberg

Last Unemployment = 5.5%Last Underemployment = 11.0%

3


It was against this challenging backdrop that risk

assets were mixed through the first quarter. U.S.

equities as measured by the S&P 500 Index fell 1.58%

during the month but are still positive for the year.

The Barclays U.S. Aggregate Bond Index was up 0.46%

during March and is up 1.6% year-to-date (YTD).


4


Emerging Markets Fixed Income

In Emerging Markets Fixed Income (EMFI), the three

sectors of the market the external sovereign,

corporate debt and local currency bonds, represented

by the JP Morgan Emerging Markets Bond Index

Global Diversified (EMBI), the JP Morgan Corporate

Emerging Markets Bond Index Broad Diversified

(CEMBI) and the JP Morgan Government Bond Index

Emerging Markets Broad Diversified (GBI-EM),

respectively posted mixed returns for March and

the first quarter.

The month of March saw uneven performance in risk

assets. U.S. equities, as measured by the S&P 500

Index, fell 1.58% in March, but still ended the first

quarter up 0.95%. Outside the U.S., foreign equities

fared better in March. Over the month, German

stocks notched strong gains amid continued tailwinds

from the European Cental Banks (ECB) bond-buying

program, while mainland Chinese stocks jumped

double-digits as investors priced in potential

government stimulus measures. Commodities prices

broadly fell over the month: gold declined -2.43% in

March, spot iron ore fell over -9%, and Brent crude oil

shed nearly -13%. 10-year U.S. Treasuries (UST) rallied

for much of the month of March and the quarter,

with yields falling to 1.92% on March 31, 25 basis

points (bps) tighter from December month-end.

For the quarter, EM sovereign bonds as represented

by the EMBI, returned 2.01%. By comparison, EM

corporate debt as represented by the CEMBI returned

2.36% for the quarter, while the strong USD

hampered EM local currency debt which shed -2.99%.

In Europe, March saw a continuation of trends that

occurred for much of the quarter due to the ECBs

quantitative easing (QE) program. All G10 currencies

were weaker versus the USD in March, with the Euro

itself falling 4.15% to bring its first quarter decline to

11.3%. Concurrently, European equities generally

rallied, with Morgan Stanley Capital International

(MSCI) Europe Index gaining 1.79% for March,

bringing its three-month return to a robust 22.38%.

The ECB officially began its long-awaited stimulus

program on March 9, buying nearly 60 billion euros

worth of covered bonds and asset-backed securities

(ABS) by the end of March. The tense, stop-and-start

austerity negotiations between Greece and the Troika

(European Commission, ECB, and International

Monetary Fund (IMF)) remain a near-term headwind

for Europe.

In China, March witnessed local equities push again to

multi-year highs not seen since 2008. The Shanghai

Stock Exchange Composite Index soared 15.88% over

the first quarter, with a strong gain of 13.22% in

March being the main driver. China equities rallied

starting March 9 as Premier Li Keqiang stated that the

government has fairly ample room to act in

deploying fiscal stimulus to support the Chinese

economy, as he also lowered the 2015 forecast for

growth to about 7.0% from 7.5%. The official

manufacturing Purchasing Managers Index (PMI)

reported modest expansion in the sector with a 50.1


-6.0%

-5.0%

-4.0%

-3.0%

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

JP Morgan Emerging Markets Bond Index Performance3/31/2014 to 3/31/2015

EMBI

CEMBI

GBI-EM

Source: JP Morgan

5


Quarterly Commentary reading, the first month of expansion in 2015. Still,

HSBCs private PMI Index, which generally reflects

smaller-to-medium-size firms, showed contraction in

manufacturing for March. The Chinese government

has also taken steps toward liberalization of interest

rates and foreign investor access to local markets,

and the state council approved the creation of

deposit insurance.

Elsewhere in emerging markets, performance was

mixed but with the stronger USD and weaker

commodity complex continuing to be macro themes.

The Russian ruble was one of the strongest

performing EM currencies in March, gaining over 6%

versus the USD and bringing first quarter gains to

4.38%, one of a handful of EM currencies stronger

versus the USD. Volatility in the ruble has dropped

significantly in the currency since January amid the

Minsk agreement ceasefire that has tentatively

avoided large-scale bloodshed in eastern Ukraine.

There are still a number of macro headwinds for

Russia, such as inflation which increased 16.9% (YoY)

in March and a looming recession. Neighboring

Ukraine and the IMF agreed on an aid package worth

$40 billion ($17.5 billion direct from the IMF) on

March 11. The Ukrainian hryvnia has strengthened

significantly from a steep low of 33.75 per USD in late

February, ending March at 23.44 per USD. On the

other end of the spectrum, the Brazilian real had a

very tough first quarter, weakening by nearly 17%

versus the USD. A corruption scandal continues to

engulf the state-owned energy giant Petrobras, as

well as a number of construction firms and politicians.

Fourth quarter GDP unexpectedly rose 0.3% quarter-

over-quarter (QoQ) in a March release, but getting a

more balanced fiscal budget remains a key concern,

with an unexpected primary deficit of 2.3 billion reais

being reported for February.

The month of March witnessed $3.43 billion inflows

into hard currency EMFI funds, bringing first quarter

total inflows to $7.84 billion. In contrast, local currency

funds saw their first monthly outflow of 2015 in

March, losing $880 million. Still, for the first quarter

local denominated funds had $2.48 billion in inflows.

6


Agency Mortgage-Backed Securities

For the month of March 2015, the Barclays U.S. MBS

Index returned .37% while the Barclays U.S.

Government Index returned close to .61%. The yield

curve slightly flattened with intermediate-term rates

declining the most. U.S. 10-year yields declined by

about 7 bps while 2-year yields declined by about 6

bps. The Barclays U.S. MBS Indexs duration

shortened from 3.73 to 3.54 while the Barclays U.S.

Government Index ended the month with a duration

closer to 5.51. Total applications for refinancing and

overall refinancing activity (based on Mortgage

Bankers Association (MBA) Refinancing and

Applications for Refinancing Indices) ticked upwards

month-over-month (MoM), while aggregate

prepayment speeds also increased.

For the quarter ending March 31, the Barclays U.S.

MBS Index returned 1.06% while the Barclays U.S.

Government Index returned 1.60%. The yield curve

continued its flattening trend with longer-term rates

declining over the trailing 3-month period. U.S 10-

year yields declined by 25 bps while U.S. 2-year yields

declined by 11 bps; additionally, U.S. 3-month LIBOR

rates increased by about 1.5 bps. The Barclays U.S.

MBS Indexs underperformance was largely due to

the sectors lower duration profile against longer-

term U.S. yields broadly declining for the period.

During this time, the Barclays U.S. MBS Indexs

duration shortened from 4.34 to 3.54, with the

Barclays U.S. Government Index ending with a

duration of 5.55.

Prepayment speeds across all agencies (Fannie Mae,

Freddie Mac, and Ginnie Mae) increased quarter-over

-quarter (QoQ) with aggregate Fannie Mae CPR

(Conditional Prepayment Rates) increasing from 12.6

to 17.6, Freddie Mac CPR increasing from 12.7 to

18.2, and Ginnie Mae CPR increasing from 16.5 to

24.5. The increase in prepayment activity was largely

caused by improving housing seasonality as we enter

into the spring months, lower 30-year mortgage

rates, and the reduction in FHA (Federal Housing

Administration) mortgage insurance premiums (MIP)


0.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00

Duration of Barclays U.S. MBS Index

3/31/20153.54

Source: Bloomberg

Conditional Prepayment Rates (CPR)

2014 - 2015 Apr May Jun Jul Aug Sept Oct Nov Dec Jan Feb Mar

Fannie Mae (FNMA) 9.9% 10.4% 11.7% 12.2% 11.4% 11.3% 11.3% 10.8% 12.6% 11.0% 14.3% 17.6%

Freddie Mac (FHLMC) 10.2% 10.8% 11.8% 12.2% 11.6% 11.2% 11.7% 11.3% 12.7% 11.3% 14.8% 18.2%

Ginnie Mae (GNMA) 12.8% 13.8% 14.8% 15.1% 14.6% 14.6% 14.8% 15.3% 16.5% 13.8% 20.4% 24.5%

Barclays Capital U.S.

MBS Index 1/31/2015 2/28/2015 3/31/2015 Change

Average Dollar Price $106.61 $106.18 $106.35 $0.17

Duration 3.20 3.73 3.54 -0.19

Barclays Capital U.S.

Index Returns 1/31/2015 2/28/2015 3/31/2015

Aggregate 2.10% -0.94% 0.46%

MBS 0.85% -0.16% 0.37%

Corporate 2.83% -0.99% 0.35%

Treasury 2.59% -1.54% 0.63%

source: eMBS, Barclays Capital

ABX & PrimeX 3 month charts - source: Morgan Stanley

FHLMC Commitment Rate - source: Bloomberg

7


enacted at the end of January. The large decline in 30-

year mortgage rates (based on Freddie Mac 30-year

Survey Commitment Rates) of approximately 20 bps

for the month of January resulted in a spike in

refinancing activity for the first half of the quarter.

Similarly to the previous quarter, much of the

prepayment activity focused around the lower, more

recent production coupons such as 3.5s to 4.5s. This

doesnt come as a surprise as the newer pools have

had less burnout with more of the underlying

borrows becoming more incentivized to refinance

given the local lows in mortgage rates at the

beginning of the year.

Throughout the quarter, total gross issuance of

Agency residential MBS was $90 billion, $93 billion,

and $105 billion for the month of January, February,

and March, respectively. The growing issuance

volume throughout the quarter was consistent with

increasing prepayment speeds during the period.

Total issuance for the quarter was almost 50% higher

compared to last years first quarter figures.

On the regulatory front, the most significant news

came at the beginning of the quarter with the

announcement by President Obama and the

Department of Housing and Urban Development

(HUD) on the reduction of FHA MIP by 50 bps. This

reduction impacted the securitized market by

incentivizing more borrowers to refinance their

mortgages due to their lower annualized cost basis.

As a result, prepayment speeds have increased within

Ginnie Mae pools (where most FHA loans reside in)

since the end of January when the reduction came

into effect.


120.00

140.00

160.00

180.00

200.00

220.00

240.00Mortgage Bankers Association (MBA) Purchase Index

Source: Bloomberg

3/27/2015188.9

0.00

1,000.00

2,000.00

3,000.00

4,000.00

5,000.00

6,000.00

7,000.00Mortgage Bankers Association (MBA) Refinance Index

3/27/20152008.7

Source: Bloomberg

8


Non-Agency Mortgage-Backed Securities

Non-Agency MBS market started out 2015 slow but

trading volume has progressed steadily coming into

the end of the first quarter, with a pick-up in trading

activity during March. Hedge funds were the biggest

sellers with buying activity being concentrated within

insurance companies and money managers. Hedge

fund redemptions, portfolio re-positioning and

Government Sponsored Enterprise (GSE) liquidation

lists all contributed to the selling volume for the

quarter with the majority of buying activity being

concentrated within insurance companies and money

managers. Subprime collateral was the largest traded

sector by volume in March. During the month,

subprime accounted for approximately $5.7 billion of

traded current face with prime and Alt-A accounting

for $1.2 and $2.1 billion respectively. Loss-adjusted

yields have remained consistent throughout the first

quarter as supply for non-Agency MBS have been met

with equivalent demand for the product. Prime

collateral traded at loss-adjusted yields of

approximately 3.75% to 4%, Alt-A from 4% to 4.25%

and subprime collateral in the 4% to 6% range

depending on weighted average life profile. Loss-

adjusted yields remained consistent with Prime bonds

trading in the 3.75% to 4% range, Alt-A bonds in the

4% to 4.25% range and subprime in the 4.5% to 6%

range depending on weighted average life (WAL)

profile.

For March, mortgage fundamentals have been

consistent and prepayment speeds, liquidation rates

and severities have been range bound. Legacy non-

Agency prepayment speeds were also essentially

unchanged with average speeds on prime, Alt-A and

subprime collateral coming in at 11.9 CPR, 5.5 CPR

and 3.3 CPR, respectively. Prepayment speeds

increased marginally during the quarter overall as

falling interest rates increased refinancing activity.

The pace of loan modifications was steady during

March with principal modifications making up 12% of

total monthly loan modifications, resulting in an

average principal balance reduction of $88,000. Rate

modification resulted in an average rate drop of

2.63%. Default liquidations speeds picked up slightly

across all sectors for the first quarter, while loss

severities remained stable throughout. Loan

modifications continued to be prevalent with

approximately 1600 loans being modified each month

with rate modifications still accounting for the lion

share of all rate modifications.

Ocwen Financial Corporation has been facing

increasing scrutiny over allegations of unfair servicing

practices and during the past quarter, Ocwen sold a

portion of their loan servicing book to Nationstar

Mortgage Holdings. In February of 2015, Ocwen sold

$10 billion of loan servicing rights followed by

another $25 billion of servicing rights in March.

Rumors continue to persist that Ocwen will seek to

sell more of its loan servicing book in the months to

come.


30

40

50

60

70

80

90

ABX Prices

ABX 2006-2 AAA

ABX 2007-1 AAA

Source: Markit via Morgan Stanley

3/31/201580.29

3/31/201575.25

9


Investment Grade Credit

Investment grade corporate bonds as measured by

the Barclays U.S. Credit Index returned 2.16% during

the first quarter as performance was mainly driven by

a decline in long-term interest rates. Against this

backdrop, the Barclays U.S. Credit Index ended the

month 5 bps wider generating a monthly total return

of 0.35%. For the first quarter, spreads were

unchanged generating a 3-month total return of

2.16% and outperforming duration-matched UST by

17 bps.

Taking a look at performance by sector showed that

defensive and story-related sectors outperformed for

the month. The leaders for March included Cable

Satellite (29 bps), Lodging (7 bps) and Supranationals

(5 bps). The Cable Satellite sector was the perfect

example of a story-related name as Time Warner

Cable bonds jumped following the announcement of

a delay in the Comcast/Time Warner Cable merger.

For the quarter, Energy-related names were the real

winner as relatively stable oil prices led to a rebound

in certain sectors. As a result, the top sectors included

Refining (244 bps), Independent Energy (154 bps),

Airlines (140 bps) and Integrated Energy (117 bps).

The worst performing sectors for the quarter were

Metals and Mining (-74 bps), Oilfield Services (-66

bps), Industrial other (-54 bps), Packaging (-52 bps)

and Sovereign (-48 bps). The weakness in Metals and

Mining has been a reoccurring theme as weaker

global demand has led to falling prices.

There was not a major divergence in performance by

credit quality during March as BBB-rated and A-rated

spreads widened by 5 bps and 7 bps, respectively. As

a result, both credit qualities underperformed relative

to UST. For the quarter, BBB-rated and A-rated

spreads tightened slightly generating an excess return

of 36 bps and 23 bps respectively.

The major topic in the investment grade space for

March was the record issuance that came to market.

Fixed-rate gross investment grade supply for March

was $155.3 billion, marking one of the highest

months on record. The supply was led by Industrials

which issued $72.4 billion of investment grade debt.

Financials followed issuing $41.1 billion in debt. Fixed-

rate gross investment grade supply came in at a

strong $379 billion for the quarter and appears to be

on track for a record year.


-3.0%

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

Performance of Select Barclays Indices Last 12 Months3/31/2014 to 3/31/2015

Barclays U.S. High Yield Index

Barclays U.S. Credit Index

Barclays U.S. Aggregate Index

Source: Barclays Live

0

20

40

60

80

100

120

140

160

180

Bill

ion

s o

f U

.S. D

olla

rs

Total Fixed-Rate Investment Grade Supply

Source: Barclays Live

10


with new-issue volume rising to $40.1 billion during

March. The increase was highlighted by the $9.1

billion issue by Valeant Pharmaceuticals where

proceeds were set aside for the purchase of Salix

Pharmaceuticals. Including March, new issue volume

totaled $95.6 billion, which is now ahead of last years

pace of $88.3 billion.

From a technical perspective, investors appeared

more cautious during March as the strong inflows

experienced during January and February tapered off.

High yield mutual funds and ETFs finally saw outflows

during March. Although minor, outflows totaled $0.8

billion during March as investors weighed oil prices

and the direction of rates.

A closer look at defaults during the March shows that

only one company defaulted (Dune Energy), affecting

just $68 million of high-yield bonds. The amount is

considered trivial given the size of the market.

Including Dune Energy, a total of 4 companies

defaulted during the quarter which equates to a total

of just over $2.9 billion in bonds. As a result, the par-

weighted U.S. high-yield default rate declined slightly

to 3.00% as of March 31. One year ago, the default

rate was just 0.61%, as TXU later defaulted. The

default rate is expected to fall next month when TXU

is removed from the calculation. The more stable

issuer-weighted default rate decreased month-over-

month to 1.65%, and is down from 1.86% in March of

last year.

High Yield

The High Yield market was bifurcated during March as

consumer-driven segments outperformed the more

volatile commodity-linked sectors. The high yield

market as measured by the Citi High-Yield Cash-Pay

Capped Index fell 0.63% during March, ending the

quarter up 2.34%. Performance was led by Food

Processors/Beverage/Bottling industry which led all

sectors posting a gain of 2.19% and 5.33%, respectively.

The bottom performers for the month included

Secondary Oil & Gas Producers and Metals/Mining. In

general, investors preferred higher-quality paper

during March and the first quarter as high quality

credits outperformed their lower rated counterparts.

After the pullback in March, the Indexs yield-to-worst

was at 6.29% on March 31, tightening 38 bps for the

quarter. The spread-to-worst tightened 19 bps to 503

bps for the first quarter.

Similar to investment grade corporates, the major

theme remains rooted around the health of the new

issue market. The new issue market remained red hot,


Source: S&P Capital IQ Leveraged Commentary and Data (LCD)

*MTD = month-to-date

**YTD = year-to-date

Food Processors/Beverage/Bottling 2.19%

Home Builders 0.93%

Retail - Food and Drug 0.62%

Building Products 0.60%

Food Processors/Beverage/Bottling 5.33%

Retail - Food and Drug 4.67%

Tower 4.09%

Leisure 4.02%

Secondary Oil & Gas Producers -3.52%

Metals/Mining -3.46%

Industrial - Other -1.54%

Oil Equipment -1.29%

Metals/Mining -1.19%

Aerospace -0.03%

Banking 1.42%

Textile/Apparel/Shoe Manufacturing 1.45%

Top-Performing Industries MTD* as of 3/31/2015

Top-Performing Industries YTD** as of 3/31/2015

Bottom-Performing Industries MTD as of 3/31/2015

Bottom-Performing Industries YTD as of 3/31/2015

11


bid. As of March end, the average bid price of the

S&P/LSTA Leveraged Loan Index was at $96.98 and is

up 1.06 points for the quarter despite a slight

decrease during March. The loan Indexs yield-to-

maturity (YTM) increased 1 bp to 5.18% during the

month of March while the discounted spread to a 3-

year life remained unchanged relative to February at

LIBOR +518 bps.

The positive performance during March was led by

the Food Service sector which was up 0.88% following

news of the Kraft-Heinz merger which boosted prices.

Electronics (+0.85%) and Food & Drug Retailers

(+0.83%) were also strong performers. On the other

side of the equation, Oil & Gas (-1.39%), Utilities (-

0.91%), and Forest Products (-0.66%) were all weaker.

For the quarter, the top performing industries

included Leisure Goods & Services (3.01%), Cosmetics

(3.01%), and Containers (2.93%). The bottom

performing industries for the quarter were

Nonferrous Metals (-1.81%), Utilities (-0.38%), and Oil

& Gas (0.16%).

There were two defaults during March which equated

to approximately $800 million. The two companies

that defaulted were Quicksilver Resources ($625

million) and Chassix ($175 million). Despite the

defaults, the trailing 12-month issuer-weighted

default rate decreased 13 bps to 0.61% as the $950

million QCE/Quiznos default in March 2014 rolled out

of the calculation.

Bank Loans

Bank loans continued their strong start to the year as

the S&P/LSTA Leveraged Loan Index posted a 0.37%

gain for the month of March. These gains come on

the heels of a strong February which showed the

largest monthly total return since January 2012. For

the first quarter of 2015, the Index gained 2.13%.

Strength in the loan market can partially be attributed

to a strong technical environment as inflows from

CLO formation and retail funds exceeded net new

supply by $18.1 billion. This figure marked the biggest

technical surplus on record as the market remains

supply constrained. Institutional loan volume totaled

$23.1 billion during March bringing year-to-date

issuance to $56.4 billion. This figure remains well

below the $128.5 billion seen during the first quarter

of 2014. The decline in volume can partially be

attributed to a decline in refinancing activity which

made up for just 30% of loan activity during March

and just under 10% for February.

The demand for paper has certainly carried over to

the secondary market where prices also remain well


Source: S&P Capital IQ Leveraged Commentary and Data (LCD)

*MTD = month-to-date

**YTD = year-to-date

Food Service 0.88%

Electronics - Electrical 0.85%

Food and Drug Retailers 0.82%

Retailers (Not Food and Drug) 0.81%

Leisure Goods-Activities -Movies 3.01%

Cosmetics - Toiletries 3.01%

Containers and Glass Products 2.93%

Retailers (Not Food and Drug) 2.90%

Oil and Gas -1.39%

Utilities -0.91%

Forest Products -0.66%

Nonferrous Metals - Minerals -0.45%

Nonferrous Metals - Minerals -1.81%

Utilities -0.38%

Oil and Gas -0.16%

Food Service 0.01%

Top-Performing Industries MTD* as of 3/31/2015

Top-Performing Industries YTD** as of 3/31/2015

Bottom-Performing Industries MTD as of 3/31/2015

Bottom-Performing Industries LTM as of 3/31/2015

12


Collateralized Loan Obligations (CLOs)

Collateralized Loan Obligations (CLOs) continued to

pick up steam in the first quarter of 2015 with 54

deals pricing for a total $29.33 billion. March was the

strongest issuance month so far this year with $14.7

billion across 27 deals coming to market and also beat

the highest monthly issuance in 2014 which was set in

June at $13.78 billion. Issuance in the first quarter of

2015 was roughly $6.7 billion ahead of issuance in the

first quarter of 2014 and on par with issuance for the

first quarter of 2013. 2014 issuance was hampered by

the announcement of the Volcker Rule. 2015

experienced similar headwinds in January as the

market tried to create solutions for risk retention.

Issuance ramped up quickly after January as many

managers wanted to issue deals ahead of

implementation of regulation.

Spreads continued to tighten over the first quarter.

Mezzanine tranches experienced the most tightening

with single As and BBBs coming in by roughly 30 bps

over the quarter. AAAs and AAs came in by 10 and 25

bps, respectively. This spread compression happened

mostly in February, with spreads remaining firm in

March.

Roughly 13% of the deals priced this month are

compliant with Euro Risk Retention regulation. Issuing

U.S. deals that are Euro Risk Retention compliant

allows the managers to issue at tighter spreads than

non-Euro compliant deals since these deals are able

to reach more investors. Another positive note of

issuing a U.S. deal that is Euro compliant is it allows

managers to show they have viable options to stay in

the sector after U.S. Risk Retention goes into effect in

December 2016. For the quarter, $3.88 billion of all

the CLOs issued this quarter were compliant with

Euro Risk Retention.


13


rates while lodging, the top performing property

sector, saw its delinquency decrease by 31 bps to

4.20%; office saw its delinquency rate improve by 8

bps to 6.06%. The industrial sector saw its

delinquency rate increase by 29 bps to 7.68%;

multifamily saw an 8 bps increase in its delinquency

rate to 8.73%, the highest among the five major

property sectors, and retail delinquency jumped 13

bps to 5.51%. The Moodys/RCA Commercial Property

Price Indices (CPPI) National Major Markets

Composite Index increased 1.34% in February 2015

while Non-Major Markets improved by 1.57%. March

loan loss severities averaged 36% on $530 million of

outstanding loans liquidated.

Commercial Mortgage-Backed Securities

The Barclays U.S. CMBS Index returned 0.63% for

March and 1.77% for the first quarter of 2015,

outperforming the broader aggregate by 16 bps for

both March and the first quarter. CMBS spreads were

mixed for the month of March, as falling UST rates led

to tighter all in yields and mostly tighter spreads;

however, some parts of the capital stack saw

weakening as investors pulled back when returns

were not meeting minimum yield hurdles. For the

month, new issue AAA widened by 1 bps to swaps

+85 bps and BBB- tightened by 3 bps to swaps +345

bps while legacy last cash flow (LCF) bonds tightened

by 4 bps to swaps +86 bps. CMBS spreads were

tighter for the quarter, despite economic turmoil in

Europe throughout January, in addition to widening

UST in February. For the quarter, new issue AAA

tightened by 3 bps to swaps +85 bps and BBB-

tightened by 13 bps to swaps +345 bps, while legacy

LCF bonds tightened by 2 bps to swaps +86 bps.

The 2015 CMBS market remains on track to set a post

-crisis new issuance volume record. The March new

issue calendar consisted of twelve deals totaling $8.4

billion brought to market. Of the twelve deals, four

were fixed-rate conduit transactions, totaling $4.4

billion of issuance. Private label CMBS issuance

finished the quarter at $24.7 billion, 15% higher than

fourth quarter 2014, 30% higher than first quarter

2014, and the second highest quarterly issuance since

the end of the financial crisis trailing only $26.3 billion

in third quarter 2014. The rise in issuance was driven

by SASB (single asset single borrower), which more

than doubled YoY while conduit issuance declined

11% compared to the same period last year.

The overall U.S. CMBS delinquency rate was

unchanged at 5.58% in March, according to Trepp

Analytics. For the month, the industrial, multifamily

and retail sectors saw an increase in delinquency


0.00

50.00

100.00

150.00

200.00

250.00

300.00

Moody's/RCA Commercial Property Price Indices12/31/2000 - 2/28/2015

Major Markets (All-Property)

Non-Major Markets (All-Property)

2/28/2015239.28

2/28/2015158.64

Source: Moody's Investor Service, Real Capital Analytics (RCA)

14


The agricultural sector saw large declines across the

board with the sector down 9.68% in the first quarter.

Grains saw declines in corn, wheat and soybeans with

wheat losing the most at -13.21% in the first quarter

of 2015. Softs were more scattered as the worst

performer, coffee, was down 21.59% while cotton

performed the best returning 4.25%. One potential

avenue for a price recovery is if adverse weather

conditions arise that impact future expected crop

yields, hence weather over the summer should be a

determinate of prices for the rest of the year.

The livestock sector was down 7.12%, as lean hogs fell

23.75% due to lack of supply constriction; fears of

viral outbreak and low litter sizes were unconfirmed

by data. Live cattle and feeder cattle were split, with

live cattle down 77 bps and feeder cattle up 61 bps.

The energy sector was down 8.86% in the first

quarter. Gasoil (diesel distillate) and Reformulated

Blendstock for Oxygenate Blending (RBOB) unleaded

gasoline had gains as the annual refinery shutdown

period decreased supply (up 1.14% and 1.69%

respectively), while the rest of the energy complex

had losses across the board. WTI crude was down the

most, losing 16.41%, as record U.S. supplies and a

large current inventory went untapped as demand

has lagged supply growth. Brent crude also fell,

ending down 8.94%, as geopolitical risk premia kept

prices slightly higher; a potential breakdown in

Iranian nuclear talks and conflict on the Arabian

Peninsula offer avenues for major Middle Eastern

supply disruptions. Heating oil was down 2.18%.

Natural gas fell 10.20% as supply remains above 72

billion cubic feet per day (bcf/d) but rig counts have

fallen, and supply could decrease over the next 6-12

months as currently producing wells dry out.

Commodities

In the first quarter of 2015 the broad commodities

markets returned -8.22% as measured by the S&P

GSCI (Goldman Sachs Commodity Index) and -5.95%

as measured by the Bloomberg Commodity Index

(BCOM). Commodities continue to be in a bear

market and this was indicated by four of the five

sectors being negative in the first quarter of 2015.

Precious metals was the only sector to achieve a

positive return; though gold ended down 24 bps in

the quarter, silver rallied 613 bps leading the sector

to a 44 bps increase. Crude oil price fluctuations

continued to be a key driver of volatility in the

commodity world, as indices traded down with it in

January, rallied back with it February before giving

way again in March. This is illustrated by the fact that

the BCOM displayed lower volatility than the S&P

GSCI due to a lower percentage exposure to the

energy sector, but still traded down as energy fell.

As mentioned above, the precious metal sector (+44

bps) displayed high dispersion as gold fell 24 bps

while silver increased over 613 bps. Gold is likely to

be sensitive to inflation, the Federal Reserve funds

rate and global contagion fears going forward. If the

U.S. economy performs well in the face of higher

short-term treasury rates and inflation remains

muted gold prices could fall. On the other hand, if

the business cycle turns south or global fears

flashpoint then gold could increase.

The industrial metals lost 5.09% as weak demand

from China and depreciating (relative to the USD)

producer currencies has weighed on prices. Nickel

was the weakest performer, losing 18.54% in the first

quarter. The bellwether copper was down 3.74%

while inventories have increased indicating a supply

surplus in the market. Other key industrial metals fell

as well with aluminum (-4.04%), zinc (-4.93%) and

lead (-2.34%) all ending down.


15


Longer maturity issues provided the best returns,

with the 30-year bond returning 1.42% compared to

0.80% for the 10-year note and 0.22% for the 2-year

note. Treasury Inflation-Protected Securities (TIPS)

returned -0.47%, weighed down by falling inflation

expectations. Municipal bonds also lagged

Treasuries, with the Barclays U.S. Municipal Bond

Index returning 0.29% in February as increased supply

weighed on the market.

The Treasury market was filled with wild swings and

reversals in the first quarter. The year began with

one of the strongest January performances on record.

The market turned on a dime and gave virtually the

entire January gain in February, while March was a

mixed bag. Net, yields were lower at quarter-end,

with the largest yield declines in intermediate

maturities. The 5-year UST note yield fell 28 bps

through the quarter, while the long bond yield fell 21

bps and the 2-year yield fell 11 bps. Long issues

returned the most, led by the 5.05% return on the 30-

year bond. TIPS and munis both fell behind

Treasuries, returning 1.42% and 1.01%, respectively.

The Treasury market entered a new phase in the

quarter. Fed policy still sets the tone for the Treasury

market, but, unlike recent past years, the near-term

outlook for Fed policy is unclear. FOMC statements

now offer little insight into the course of policy, as the

mixed economic data, policy divergence between the

Fed and other central banks, disagreements within

the FOMC and the Feds efforts to afford itself

increased flexibility have robbed the Feds statements

of any substance.

U.S. Government Securities

The UST market was unsettled in March, as a sharp sell

-off began the month in the wake of another stronger

than expected employment report. February job

creation a 295k increase in non-farm payrolls was

well above the consensus forecast of 235k. The 10-

year UST yield closed at 2.24% on March 6, the highest

since December 2014. A rally began on the next

trading day as the ECB launched its bond buying

program in Europe and low and falling European

sovereign yields and a strengthening dollar gave

support to Treasuries. The rally accelerated through

March 18, the day of the FOMC rate decision. As

expected the FOMC removed patient from its

statement, opening the possibility of a June rate hike.

Unexpected, though, was the decisive downward

revision to FOMC members forecast of growth and

inflation, as well as the dots indicating the members

expectations of the pace of policy tightening. The

downgraded economic outlook prompted an 11 bps

rally by the 10-year Treasury. UST moved sideways for

the remainder of the month amid generally weaker

than expected economic data.

Treasury yields were lower at the conclusion of the

months gyrations. Yields on intermediate UST fell the

most, as is typical when economic forecasts are

revised lower. The 5-year UST yield fell 13 bps. The 2-

year and 10-year yields both fell 7 bps. The Barclays

U.S. Government Index returned 0.61% in March.


2/28/2015 3/31/2015 Change

3 month 0.01% 0.02% 1.00%

6 month 0.07% 0.14% 0.07%

1 year 0.19% 0.23% 0.04%

2 year 0.62% 0.56% -0.06%

3 year 1.00% 0.88% -0.12%

5 year 1.50% 1.37% -0.13%

10 year 1.99% 1.92% -0.07%

30 year 2.59% 2.54% -0.05%

Source: Bloomberg

Yield Curve

16


coming from volume and 0.4% coming from price

increases. This paints a picture that is very consistent

with macroeconomic data: very little inflation (and

therefore pricing power) and slow but positive

volume growth. It seems we remain in a lackluster

economy. Of note, margin expansion contributed 2.1

percentage points to earnings per share (EPS) growth.

This is the growth factor we find most at risk,

especially if the U.S. economy starts (finally) to see

meaningful wage growth.

U.S. Equities

With an absence of meaningful corporate earnings

news, the direction of the USD took center stage in the

equity markets in March. Earlier in the quarter, in

January the three factors (all non-equity) which

dominated the equity market since mid-2014

continued to hold majority sway: falling oil prices,

falling Treasury yields, and the strengthening dollar.

Both oil and the USD had been essentially one-

directional trades since July, and January saw yields on

the 10-year UST fall to levels not seen since the 2013

Taper Tantrum. Mid-March, the USD Index briefly

traded above $100, a level last seen in 2003.

Within equities, small cap stocks significantly

outperformed the large capitalization benchmarks.

For the month of March, the S&P 500 Index lost almost

1.6%, while the Russell 2000 Index gained over 1.7%.

This outperformance by small caps is consistent with

the lower exposure of smaller companies to non-USD

revenue sources.

Within the S&P 500, sector performance was also

closely tied to currency exposure for March. The best

performing sectors were those most tied to the

domestic U.S. economy specifically Healthcare and

Consumer Discretionary. Healthcare was the only

sector of the S&P 500 to post positive returns in

March, gaining less than 1%. The Materials sector was

the worst performing sector in the month, losing

almost 5%. Given the collapse in commodity prices, in

retrospect this performance is not surprising.

Industrials and Technology, both sectors with

significant exposure to non-U.S. markets, were also

weak. Within the S&P 500 Technology lost 3.3% and

Industrials lost 2.6%.

Revenue growth continued to be tough for

corporations to find during the first quarter as a

whole. Total revenue growth was only 2.4%, with 2.0%


17


15.87%, as measured by the Shanghai Composite. The

Nikkei was up 10.06%, Hang Seng was up 5.49%, and

Kospi was up 6.55%.3 Chinese equities benefited

from accommodative policies from the Peoples Bank

of China (PBoC) while Japanese equities were

supported by Japanese pension fund demand.

EM sold off in the month of March with the MSCI

Emerging Markets Index down 1.59%, while

managing a +1.91% return in the fourth quarter.

Russian equities declined in March with the MSCI

Russia Index down 2.67% but posted a +18.61%

return during the quarter. Brazilian equities, as

measured by the Bovespa declined 0.84% in March

but increased 2.29% for the quarter as the country

suffers from lower commodity prices, high inflation,

and twin budget and current account deficits.

Global Equities

Global equities as measured by the MSCI All Country

World Index (ACWI) declined 1.78% in March but

ended the first quarter up 1.83%. U.S. equities were

generally lower during the month with the S&P 500

Index and Dow Jones down 1.74% and 1.97%,

respectively. The Nasdaq and Russell 2000 Index were

mixed during the month of March, with the former

down 1.26% and the latter up 1.57%. Despite the weak

March performance, U.S. equities posted mixed

returns for the quarter with the S&P 500 up 0.44%,

Dow Jones down 0.26%, Nasdaq up 3.48%, and

Russell 2000 up 3.99%. The macro data out of the U.S.

was mixed with better than expected jobs data;

however, retail sales and manufacturing data came in

weaker than expected. The FOMC hinted that it could

begin hiking interest rates as early as June of this year,

data permitting.

In Europe, regional equities rallied in March with the

DAX up 4.95%, CAC up 1.66%, FTSEMIB up 3.67%, and

IBEX up 3.07%. UK equities underperformed with the

FTSE down 2.33%. For the quarter, European equities

moved significantly higher with DAX up 22.03%, CAC

up 17.81%, and FTSE up 3.15%, while in the periphery,

equities rallied with the FTSEMIB up 21.80% and IBEX

up 12.08%.2 The economic data across the Eurozone

was generally better than expected although inflation

continued to run well below the ECBs target inflation

rate.

Asian equities performed well for the month with the

Nikkei up 2.18%, Shanghai Composite up 13.22%, Hang

Seng up 0.31%, and Kospi up 2.78%. For the quarter,

Asian equities were higher, with Chinese equities up


2. The DAX is the German stock index, representing 30 of the largest and most liquid German Companies that trade on the Frankfurt Exchange. The CAC 40 Index is a

French stock market index, tracking 40 of the largest French stocks on the Paris Bourse. The FTSE MIB is a benchmark stock market index for the Borsa Italiana, the Italian

national stock exchange, which consists of the 40 most-traded stock classes on the exchange. The IBEX is the official index of the Spanish Continuous Market, comprised

of the 35 most liquid stocks traded on that market.

3. The Nikkei is a price-weighted index comprised of Japans top 225 blue-chip companies on the Tokyo Stock Exchange. The Hang Seng is a free-float capitalization-

weighted index of a selection of companies from the Stock Exchange of Hong Kong. The Kospi is a market capitalization weighted index of all common stocks traded on

the Stock market Division on the Korea Stock Exchange.

18


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Disclaimer

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bloomberg2014q4 growth

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yearoveryear yoy

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