The first quarter of 2016 witnessed a wild start to the year with financial markets experiencing extreme levels of volatility. Investors exited risk assets early in the quarter to seek the safety of U.S. Treasuries as concerns over global growth (driven by weakness in commodities) decreased investor demand for risk. The selling peaked halfway through February before abruptly reversing course and rallying for the remainder of the quarter. Despite the volatile ride, equity and credit markets ended the quarter largely unchanged from where they entered the year. We continue to believe that 2016 will experience pockets of heightened volatility, although not necessarily to the extent to which we experienced in the first quarter. There are several factors that could impact credit spreads and general interest rates during the year, including: the price of oil, economic data both globally and in the U.S., FOMC actions, Central Bank policy overseas, BREXIT (Britain’s possible exit from the EU), etc. That said, while there will be temporary spikes in spreads, interest rates, and prices, we feel that the strength of our economy combined with the attractiveness of U.S. Treasury yields relative to other developed countries (many of which are experiencing negative rates), should keep spreads and interest rates from moving significantly higher for a sustained period of time.
Please take a moment to read our complete commentary by John Wolfsberg, Managing Principal: