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Important risk considerations
The opinions expressed are those of the author(s) are as of the date indicated and may
change based on
market and other conditions. The accuracy of the content and its relevance to your client’s particular
circumstances is not guaranteed.
This market commentary has been prepared for general informational purposes by the
team, who are part of
Macquarie Asset Management (MAM), the asset management business of Macquarie Group (Macquarie), and is
not a
product of the Macquarie Research Department. This market commentary reflects the views of the team and
statements in it may differ from the views of others in MAM or of other Macquarie divisions or groups,
including Macquarie Research. This market commentary has not been prepared to comply with requirements
designed to promote the independence of investment research and is accordingly not subject to any
prohibition on dealing ahead of the dissemination of investment research.
Nothing in this market commentary shall be construed as a solicitation to buy or sell
any security or other
product, or to engage in or refrain from engaging in any transaction. Macquarie conducts a global
full-service, integrated investment banking, asset management, and brokerage business. Macquarie may do,
and
seek to do, business with any of the companies covered in this market commentary. Macquarie has
investment
banking and other business relationships with a significant number of companies, which may include
companies
that are discussed in this commentary, and may have positions in financial instruments or other financial
interests in the subject matter of this market commentary. As a result, investors should be aware that
Macquarie may have a conflict of interest that could affect the objectivity of this market commentary. In
preparing this market commentary, we did not take into account the investment objectives, financial
situation or needs of any particular client. You should not make an investment decision on the basis of
this
market commentary. Before making an investment decision you need to consider, with or without the
assistance
of an adviser, whether the investment is appropriate in light of your particular investment needs,
objectives and financial circumstances.
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market commentary,
analysis, trading strategies or research products to Macquarie’s clients that reflect opinions which are
different from or contrary to the opinions expressed in this market commentary. Macquarie’s asset
management
business (including MAM), principal trading desks and investing businesses may make investment decisions
that are inconsistent with the views expressed in this commentary. There are risks involved in investing.
The price of securities and other financial products can and does fluctuate, and an individual security
or
financial product may even become valueless. International investors are reminded of the additional risks
inherent in international investments, such as currency fluctuations and international or local
financial,
market, economic, tax or regulatory conditions, which may adversely affect the value of the investment.
This
market commentary is based on information obtained from sources believed to be reliable, but we do not
make
any representation or warranty that it is accurate, complete or up to date. We accept no obligation to
correct or update the information or opinions in this market commentary. Opinions, information, and data
in
this market commentary are as of the date indicated on the cover and subject to change without notice. No
member of the Macquarie Group accepts any liability whatsoever for any direct, indirect, consequential or
other loss arising from any use of this market commentary and/or further communication in relation to
this
market commentary. Some of the data in this market commentary may be sourced from information and
materials
published by government or industry bodies or agencies, however this market commentary is neither
endorsed
or certified by any such bodies or agencies. This market commentary does not constitute legal, tax
accounting or investment advice. Recipients should independently evaluate any specific investment in
consultation with their legal, tax, accounting, and investment advisors. Past performance is not
indicative
of future results.
This market commentary may include forward looking statements, forecasts, estimates,
projections, opinions
and investment theses, which may be identified by the use of terminology such as “anticipate”, “believe”,
“estimate”, “expect”, “intend”, “may”, “can”, “plan”, “will”, “would”, “should”, “seek”, “project”,
“continue”, “target” and similar expressions. No representation is made or will be made that any
forward-looking statements will be achieved or will prove to be correct or that any assumptions on which
such statements may be based are reasonable. A number of factors could cause actual future results and
operations to vary materially and adversely from the forward-looking statements. Qualitative statements
regarding political, regulatory, market and economic environments and opportunities are based on the
team’s
opinion, belief and judgment.
Past performance does not guarantee future results.
Diversification may not protect against market risk.
Fixed income securities are subject to credit risk, which is the risk of loss of
principal or loss of a
financial reward stemming from a borrower’s failure to repay a loan or otherwise meet a contractual
obligation. Credit risk arises whenever a borrower expects to use future cash flows to pay a current
debt.
Investors are compensated for assuming credit risk by way of interest payments from the borrower or
issuer
of a debt obligation. Credit risk is closely tied to the potential return of an investment, the most
notable
being that the yields on bonds correlate strongly to their perceived credit risk.
Fixed income securities are also subject to interest rate risk, which is the risk that
the prices of fixed
income securities will increase as interest rates fall and decrease as interest rates rise. Interest rate
changes are influenced by a number of factors, such as government policy, monetary policy, inflation
expectations, and the supply and demand of securities. Fixed income securities with longer maturities or
duration generally are more sensitive to interest rate changes.
Fixed income securities may also be subject to prepayment risk, which is the risk that
the principal of a
bond that is held by a portfolio will be prepaid prior to maturity at the time when interest rates are
lower
than what the bond was paying. A portfolio may then have to reinvest that money at a lower interest rate.
Market risk is the risk that all or a majority of the securities in a certain market – like the stock
market
or bond market – will decline in value because of factors such as adverse political or economic
conditions,
future expectations, investor confidence, or heavy institutional selling.
Credit risk is the risk of loss of principal or loss of a financial reward stemming
from a borrower’s
failure to repay a loan or otherwise meet a contractual obligation. Credit risk arises whenever a
borrower
expects to use future cash flows to pay a current debt. Investors are compensated for assuming credit
risk
by way of interest payments from the borrower or issuer of a debt obligation. Credit risk is closely tied
to
the potential return of an investment, the most notable being that the yields on bonds correlate strongly
to
their perceived credit risk.
Currency risk is the risk that fluctuations in exchange rates between the US dollar
and foreign currencies
and between various foreign currencies may cause the value of an investment to decline. The market for
some
(or all) currencies may from time to time have low trading volume and become illiquid, which may prevent
an
investment from effecting positions or from promptly liquidating unfavourable positions in such markets,
thus subjecting the investment to substantial losses.
Equity securities are subject to price fluctuation and possible loss of principal.
International investments entail risks including fluctuation in currency values,
differences in accounting
principles, or economic or political instability. Investing in emerging markets can be riskier than
investing in established foreign markets due to increased volatility, lower trading volume, and higher
risk
of market closures. In many emerging markets, there is substantially less publicly available information
and
the available information may be incomplete or misleading. Legal claims are generally more difficult to
pursue.
Liquidity risk is the possibility that securities cannot be readily sold within seven
days at approximately
the price at which a fund has valued them.
Market risk is the risk that all or a majority of the securities in a certain market –
like the stock market
or bond market – will decline in value because of factors such as adverse political or economic
conditions,
future expectations, investor confidence, or heavy institutional selling.
Mortgage-backed securities (MBS) and asset-backed securities (ABS) are subject to
credit risk and interest
rate risk and may also be subject to prepayment risk and extension risk. In addition, MBS and ABS may
decline in value, become more volatile, face difficulties in valuation, or experience reduced liquidity
due
to changes in interest rates or general economic conditions. Certain MBS, such as collateralized mortgage
obligations, real estate mortgage investment conduits, and stripped MBS may be more susceptible to these
risks than other MBS.
Inflation is the rate at which the general level of prices for goods and services is
rising, and,
subsequently, purchasing power is falling. Central banks attempt to stop severe inflation, along with
severe
deflation, in an attempt to keep the excessive growth of prices to a minimum.
Additional Tier 1 (AT1) Bonds serve as capital instruments that banks utilize to
augment their core equity
base. Unlike conventional bonds, AT1 Bonds are perpetual and thus, the investors are not paid the
principal
amount.
Duration measures a bond’s sensitivity to interest rates, by indicating the
approximate percentage of change
in a bond or bond fund’s price given a 1% change in interest rates.
Inflation is the rate at which the general level of prices for goods and services is
rising, and,
subsequently, purchasing power is falling. Central banks attempt to stop severe inflation, along with
severe
deflation, in an attempt to keep the excessive growth of prices to a minimum.
A Treasury yield refers to the effective yearly interest rate the US government pays
on money it borrows to
raise capital through selling Treasury bonds, also referred to as Treasury notes or Treasury bills
depending
on maturity length.
The yield curve is a line that plots the interest rates, at a set point in time, of
bonds having equal
credit quality, but differing maturity dates. The most frequently reported yield curve compares the
3-month,
2-year, 5-year, and 30-year US Treasury debt. This yield curve is used as a benchmark for other debt in
the
market, such as mortgage rates or bank lending rates. It is also used to predict changes in economic
output
and growth.
The shape of the yield curve is closely scrutinized because it helps to give an idea
of future interest rate
change and economic activity. There are three main types of yield curve shapes: normal, inverted and flat
(or humped). A normal yield curve is one in which longer maturity bonds have a higher yield compared to
shorter-term bonds due to the risks associated with time. An inverted yield curve is one in which the
shorter-term yields are higher than the longer-term yields, which can be a sign of upcoming recession. A
flat (or humped) yield curve is one in which the shorter- and longer-term yields are very close to each
other, which is also a predictor of an economic transition. The slope of the yield curve is also seen as
important: the greater the slope, the greater the gap between short- and long-term rates.
Yield curve inversion is when coupon payments on shorter-term Treasury bonds exceed
the interest paid on
longer-term bonds.
Economic trend information is sourced from Bloomberg unless otherwise noted.
All third-party marks cited are the property of their respective owners.
Macquarie Group, its employees and officers may act in different, potentially
conflicting, roles in
providing the financial services referred to in this document. The Macquarie Group entities may from time
to
time act as trustee, administrator, registrar, custodian, investment manager or investment advisor,
representative or otherwise for a product or may be otherwise involved in or with, other products and
clients which have similar investment objectives to those of the products described herein. Due to the
conflicting nature of these roles, the interests of Macquarie Group may from time to time be inconsistent
with the Interests of investors. Macquarie Group entities may receive remuneration as a result of acting
in
these roles. Macquarie Group has conflict of interest policies which aim to manage conflicts of interest.