US FIXED INCOME COMMENTARY
Q1 2017
Summary

US Presidential election results fueled speculation of higher growth and fiscal stimulus.

The Federal Reserve raised rates for the only time in 2016, and for the first time since December 2015.

The quarter was one of two halves, with a post-election risk appetite shift affecting both equities and fixed
income securities.

Foreign demand for USD credit may start to tail off as rising hedging costs may prevent a continuation of the
2016 trend.

Our ability to selectively add individual credits while adhering to our goal of principal preservation may help
determine performance results over the coming 12 months.
Q4 and 2016 Total Returns (%)
20.0%
17.49%
15.0%
11.96%
10.16%
10.0%
5.63%
5.0%
3.82%
2.65%
1.88%
2.26%
0.0%
-2.98%
-5.0%
US Stocks
US IG Bonds
-2.97%
US IG Credit
4Q 2016
US HY Credit
US Floating Rate Loans
2016
Morningstar Direct. As of 30 December 2016. As measured by the QTD and YTD total returns of the following indices: S&P 500 Index, Bloomberg
Barclays US Aggregate Index, Bloomberg Barclays US Credit Index, BofAML US High Yield Index and the S&P/LSTA Leveraged Loan Index. See
disclosures for full descriptions. Indices are unmanaged and cannot be invested in directly. The index returns shown do not include any transaction
costs, management fees, or other costs. The indices provided in this chart represent the investment environment existing during the time periods
shown. The information provided is for comparison purposes only to reflect general market conditions. Index returns represent past performance
and are not indicative of any specific investment. Past performance of the indices is no guarantee of future results.
1
Q4 2016 Recap
The bifurcation between the Federal Reserve and other global central banks continued to be a major theme through the
quarter, with the Fed choosing to raise its base interest rate target by a quarter percentage point in December. Other
major economies continued to keep their central bank rates low in order to further spur inflation and growth. The results of
the US presidential election further drove differentiation between the US and other major economies as expectations for
some form of fiscal stimulus and an eased regulatory environment drove up growth projections for the US and added to
ongoing inflationary expectations. These factors combined to ultimately push US Treasury yields higher through the
quarter. By the end of December, 5- and 10-year
US Treasury yields increased 79 bps and 85 bps,
The results of the US presidential election further
respectively, to 1.93% and 2.45%;1 reaching the
drove differentiation between the US and other
highest levels since 2014. Against a backdrop of
major economies as (…) expectations drove up
changing risk appetite and rising rates, high yield
growth projections for the US and added to ongoing
led USD fixed income performance. Below, we
inflationary expectations.
highlight several themes that influenced
performance during the quarter.
Federal Reserve Rate Hike
The Federal Open Markets Committee gave a vote of confidence to the economy by unanimously voting to
increase Fed Funds by a quarter percentage point in December, the first increase in a year. The dot plot further
indicates Fed officials’ median expectations include three gradual hikes in each of the next three years, although
press releases indicate that the Fed is taking a wait-and-see approach until the new administration’s fiscal policies
become more clear in 1Q 2017. The rate increase was widely expected by our portfolio managers and the market,
and our outlook is unchanged following the rate increase.
Strengthening US Economic Data
US economic data continued to strengthen throughout the quarter, collectively reflecting ongoing, yet modest
expansion. The Labor Market Conditions Index, designed to capture aggregate expansion and contraction of the
labor market, returned to positive territory after falling last quarter. With headline unemployment falling to 4.6%,
wage growth accelerated, however the overall labor force participation rate remained steady, which could suggest
more mixed conditions.2 Home prices continued to rise, surpassing highs from before the financial crisis (on a
non-inflation adjusted basis), and rising consumer spending continued to offer ballast to the domestic economy. 3
US GDP grew at an estimated annualized pace of 3.5% during the third quarter, with strengthening consumer
spending data.4
US Unemployment Rate (%)
9.0%
8.0%
7.0%
6.0%
5.0%
4.0%
Dec-12
Dec-13
Dec-14
Dec-15
Dec-16
Bureau of Labor Statistics. 6 January 2017.
1
Federal Reserve. 3 January 2017.
2
Factset, St Louis Federal Reserve Bank and Bureau of Labor Statistics. 20 December 2016.
3
S&P/Case-Shiller Index. 30 December 2016.
4
BEA. Based on the third estimate of Q3 2016 GDP. 22 December 2016.
2
New Administration Policies
As a result of the Republican sweep of both chambers of Congress and the White House, a broadly pro-business,
anti-regulatory agenda is forecast to be implemented over the next several years. Industries that have been
subject to increased regulation over the last eight years saw a rebound through the latter part of the quarter –
financials and energy both outperformed on the likelihood of a lessening regulatory environment.5
Further, consistent with Republican policies regarding the Affordable Care Act, pharmaceuticals and biotech both
rebounded due to likely restrictions on drug pricing that were expected under a Clinton administration not
emerging. 6 Hospitals though saw more negative sentiment due to ACA reform that could impact care-giving
institutions. One area of policy that remains uncertain is the potential for increased trade barriers, which would
likely impact technology and manufacturing firms and could cause inflationary pressures.
Immigration reform would further impact labor-intensive and housing sectors, while environmental regulation
reform would be widely viewed as a positive result for energy sector related firms. Each of these factors however
remains uncertain in effect and severity.
The combination of the above factors helped investment grade (IG) and high yield (HY) credit spreads tighten 13 and 75
bps, respectively, to 118 and 422 bps above duration-matched Treasuries.7 Spreads generally tightened throughout the
quarter, with a noticeable short-lived widening around the presidential election. Spreads ended the quarter near YTD tight
levels.8
US HY Credit Spreads
US IG Credit Spreads
600
2,500
500
2,000
OAS (bps)
OAS (bps)
400
300
1,500
1,000
200
500
100
0
Dec-06
Dec-11
0
Dec-06
Dec-16
Barclays and BofAML. 3 January 2017. IG spreads as measured by
the option adjusted spread of the Bloomberg Barclays US Credit
Index.
Dec-11
Dec-16
Barclays and BofAML. 3 January 2017. HY spreads as measured
by the option adjusted spread of the BofAML US High Yield Index.
5
Barclays. Global 2017 Credit Outlook. 2 December 2016.
6
Barclays. Global 2017 Credit Outlook. 2 December 2016.
7
Barclays and BofAML. Based on the Bloomberg Barclays US Credit Index and the BofAML US High Yield Index. 3 January 2017.
8
Barclays. Based on the Bloomberg Barclays US Credit Index OAS. 21 December 2016.
3
Looking Forward
Economy and Policy
Considering shifting policy expectations as a result of the incoming administration, we are lifting our GDP growth outlook
slightly to 2.5-3.0% over the next year. The precise balance of growth continues to remain uncertain, pertaining to when
various regulatory and taxation policies are implemented and the potential for fiscal stimulus and infrastructure spending.
If growth or inflation pick up at an increasing pace, this could encourage the Fed to normalize rates at a faster pace,
acting as a headwind. This level of growth is less supportive of duration sensitive fixed income assets, while certain
segments, such as High Yield, are less susceptible.
Ongoing dollar strength and potential trade policy changes could also act as headwinds to our growth outlook. However,
personal consumption, the largest engine of US GDP growth, was solid through the quarter, thanks in large part to lower
unemployment and overall healthy household balance sheets. Furthermore, tightening, but broadly accommodative
monetary policy should continue to support consumer spending and the housing sector.
Treasury data. 3 January 2016.
We still expect the Fed to raise rates either twice or three times through 2017, although this depends on the data as it is
released through the year and is reliant on there being no macro shocks, such as a Chinese credit crunch or European
instability as Brexit negotiations continue.
The ability of OPEC to agree to meaningful cuts, coupled with the agreement of non-OPEC countries to cut production, is
broadly supportive of oil prices going into 2017. We do not expect prices to rise to the level where US shale production
becomes fully viable, but a stronger oil price is still broadly supportive of economic growth. The continued resurgence in
the broader commodity sector can be further seen in rising rig counts and railcar loadings data.9
9
ISI Macro Update. 19 December 2016
4
Credit Market Perspectives

Fundamentals
In light of changing expectations for the US tax environment, earnings are forecast to have a much better 2017
compared to the last few quarters. However, the precise pacing and impact of any tax cuts and fiscal spending
remain uncertain. A more positive story for the Energy and Financial sectors though stands to lift broader
forecasts. Further, the rebound in commodities should act as an additional tailwind. Releveraging activity appears
to be declining, an added improvement in fundamentals when combined with the positive earnings story we have
seen across investment grade firms.10 Default activity has declined over the latter half of the year but could rise in
early 2017 toward long term historical averages. In light of our expectations for improving US economic growth,
we expect balance sheets to improve modestly, barring any macro shocks and aforementioned policy uncertainty.
Technicals however will likely continue to be a primary driver of market movement.

Valuations
The 2016 rally has sent index spreads to levels that we consider tight, which means that there is limited room for
further compression, although spreads can still grind tighter while awaiting a breakout. At 118 and 422 bps,
respectively, both IG and HY credit spreads ended significantly narrower YoY.11 Sector-level opportunities within
high yield have also declined, again highlighting the importance of individual security selection criteria, as
opportunities for more macro calls diminish in impact. For example, at the beginning of the year, sector spread
differential was over 1300 bps, whereas by the end of November the widest sectors were only 600 bps apart.12 In
light of this environment, we are careful to pare back exposure where we believe the current risk/return potential
is skewed to the downside and will continue to leverage our intensive research process to selectively add credit
risk when appropriate.

Technicals
A technical driven environment continues to persist, with the macro economic environment and central bank
action also taking a strong role in driving markets. USD fixed income should continue to be supported by demand
from yield-seeking global and domestic investors, although the strength of the dollar and rising hedging costs
could begin to eat into this source of demand going into 2017. With US economic growth one of the few highlights
of developed economies through 2016, we broadly expect the underlying characteristics of demand to continue.
However, monetary headwinds are gathering on the horizon as the credit cycle enters is later stages, and flows
from fixed income into equity assets could become a story stretching into 2017. Technicals do on balance remain
strong though. While supply is expected to fall modestly through 2017, demand is expected to remain broadly
supported, which should act as a tailwind for IG fixed income. Regardless, we will continue to focus on credit level
security selection, an area where we believe we have an advantage and is likely to increasingly drive
performance relative to peers.
US Dollar Index
105
95
85
75
Dec-11
Dec-12
Dec-13
Dec-14
Dec-15
Dec-16
Factset. DXY Dollar Index Values. 6 January 2017.
10
BofAML Situation Room. 27 December 2016.
11
Barclays and BofAML. 3 January 2016. IG spreads as measured by the option adjusted spread of the Bloomberg Barclays US Credit Index. As of 30
December 2015, the IG spread was 155 bps. HY spreads as measured by the option adjusted spread of the BofAML US High Yield Index. As of 30
December 2015, the HY spread was 695 bps.
12
BofAML. High Yield Credit Chartbooks. 31 January 2016 and 30 November 2016. Based on sector-level OAS for each respective time period.
5
When ongoing monetary and fiscal uncertainty is considered, our broader outlook is muted, and the risk of volatility
increases. Global macro risks from China and emerging markets remain, although they have mitigated somewhat, and
uncertainty around the European banking sector and the ongoing development of Brexit are potential shocks and political
developments in Europe. The strength of the dollar and its potential impact on emerging markets and trade also weighs as
a risk. The uncertainty around incoming fiscal policy, potential infrastructure stimulus and immigration and trade policy
continue to be a potential cause of volatility domestically. Oil price instability has dropped off our radar of risk to some
extent, although the OPEC deal could still unravel if quotas are not properly enforced by the cartel.
Portfolio Themes13
Many of the ideas discussed in last quarter’s outlook remain in place. As a number of our strategies span the broader
bond markets, some of the general themes discussed below are not expressed uniformly across all our fixed income
mandates.

Greater diversification – We have continued to diversify both across and within sectors as a result of higher
valuations, and through ratings brackets, seeing value in a broader universe of individual credits rather than
taking more macro views. By seeking greater portfolio diversification, we endeavor to reduce idiosyncratic risks.

Higher quality, higher liquidity – Our skepticism toward the longevity of the favorable technical tailwinds in
place has prompted us to shift our portfolio’s position toward higher quality, more liquid issues. We have
correspondingly increased exposures to sectors such as Beverage and Tobacco for example, which exhibit higher
levels of safety, as opposed to simply measuring by ratings. We’ve reduced overall portfolio exposure to Banking
over the last six months as well.

Adding strong convictions when supply merits – Our portfolios have been participating further in individual
names both up and down quality when we see value in those securities. Banks and Energy have been two
sectors where we have been building positions when supply and the individual credits have met our criteria.
We’ve also increased ABS exposures. Our managers will continue to monitor individual credits carefully to build
positions as appropriate.
In Summary
It is a time of broad uncertainty across the financial markets. With the Federal Reserve choosing to enter an era of
monetary policy normalization and with an incoming administration whose policies remain broadly uncertain in impact and
timing, there is wide disagreement as to what level of risk is appropriate.
A significant driver of our neutral-to-defensive posture continues to be driven by increasing valuations, which are in
danger of becoming stretched. However, our fundamental, bottom up, individual credit selection approach gives us
credence to find value where we can find it and focus on fundamental aspects of the companies we invest in, but we
would be unwise to ignore the potential macro shocks that could be on the horizon. Growth is broadly expected to pick up,
but headwinds remain, and US fixed income assets remain attractive in terms of yield and as a portfolio diversifier.
Consequently, we have largely maintained our portfolios’ neutral-to-defensive postures in order to balance our core goals
of preserving capital while selectively adding credits with compelling total return potential.
13
The following positioning statements may not be applicable to all PPMA-subadvised or managed portfolios.
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Index Descriptions: The indices provided in this report represent the investment environment during
the time periods discussed. The information provided is for comparison purposes only to reflect
general market conditions. The following are descriptions of each index referenced in this report:
The Bloomberg Barclays US Credit Index provides a broad measure of investment grade, US
dollar-denominated credit securities. It includes publicly issued US and SEC-registered global
corporate securities, foreign debt and secured notes.
The Bloomberg Barclays US Aggregate Index provides a broad measure of US investment grade,
US dollar-denominated fixed rate bonds. It includes Treasuries, government-rated issues, corporate
bonds, MBS, CMBS and ABS securities.
The BofAML US Corporate Bond Index provides a broad measure of the US dollar denominated
investment grade corporate debt securities publicly issued in the US domestic market.
The BofAML US High Yield Index provides a broad measure of below investment grade, US dollardenominated fixed rate corporate debt. It includes corporate bonds with risk exposures to countries
that are members of the FX-G10, Western Europe or territories of the US and Western Europe.
The Labor Market Conditions Index (LMCI) is derived from a dynamic factor model that extracts
the primary common variation from 19, seasonally-adjusted, labor market indicators.
The US Dollar Index (USDX, DXY) is an index (or measure) of the value of the United States dollar
relative to a basket of foreign currencies, often referred to as a basket of US trade partners'
currencies.
The S&P 500 Index provides a broad, market capitalization-weighted measure of US large cap
stocks. It includes approximately 500 publicly traded stocks of the largest US companies.
The S&P/LSTA Leveraged Loan Index provides a broad, market value-weighted measure of US
institutional leveraged loans. It includes the institutional tranches of loans syndicated to US loan
investors.
The S&P CoreLogic Case-Shiller 20-City Composite Home Price NSA Index seeks to measures
the value of residential real estate in 20 major U.S. metropolitan areas
The information provided in this report should not be considered a recommendation to purchase or
sell any particular type of security. There is no assurance that types of securities discussed herein
are held in any portfolio at the time you receive this report or that types of securities sold have not
been repurchased. It should not be assumed that any of the types of securities discussed were or will
prove to be profitable or that the investment recommendations or decisions we make in the future will
be profitable or will equal the investment performance of the types of securities discussed herein.
The information presented herein has been prepared solely for informational purposes. Unless
otherwise stated, information or views herein contained are as of the date indicated. The views
expressed herein, as well as forecast or portfolio strategies, may be changed in the future, reflecting
change of various factors, including economic fundamentals. This commentary is not an offer, or a
solicitation of an offer, to buy or sell any instrument. Nothing contained herein shall be relied upon as
a promise or representation whether as to past or future performance. Past performance is no
guarantee of future results.
© 2017 PPM America, Inc. All rights reserved.
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