The following commentary was recently published in the Ladder Select Bond Fund Annual Letter to Shareholders, which can be accessed here.
Over the Fund’s annual period, the Treasury curve exhibited significant volatility while aggressively flattening, and over the past quarter ended February 28th, 2019, Treasury yields have moved considerably lower. Looking at the year over year move in interest rates along with the intra-year highs across the Treasury curve. During this timeframe, the 3-month Treasury bill yield was 78 basis points higher, closing at 2.43% (intra-year high of 2.44% on February 21st, 2019); the 2-year Treasury yield was 26 basis points higher, closing at 2.51% (intra-year high of 2.96% on November 8th, 2018); the 5-year Treasury yield decreased by 13 basis points, closing at 2.51% (intra-year high of 3.09% on November 8th, 2018); the 10-year Treasury yield decreased by 15 basis points, closing at 2.72% (intra-year high of 3.24% on November 8th, 2018); and the 30-year Treasury yield decreased by 4 basis points, closing at 3.08% (intra-year high of 3.45 on November 2nd, 2018). The annual period was a tale of two different stories. During the period, through November of 2018, interest rates rose on the reality and continued expectation of strong U.S. GDP growth. During the final months of 2018, as realized by Treasury curve yields achieving intra-year highs in November, market expectations quickly changed on softening economic data, a December Federal Open Market Committee meeting which tightened monetary policy another 25bps irrespective of the markets view that such action was not necessary, and a continuing trade war with China resulting in negative economic effects globally.
The CMBS investment grade credit curve steepened during the annual period, with on the run last cash flow AAAs wider by 29 basis points and on the run BBB- bonds wider by 40 basis points according to Deutsche Bank Research. In addition, negative sentiment towards credit risk and increased market volatility in Q4 2018 along with the resulting ‘flight to quality’ rally in Treasury prices caused credit spreads to widen. Intermediate and shorter duration credit spreads performed well, however, with 2013 last cash flow AAA bonds, which LCAM looks at as an example of intermediate-duration performance, being unchanged over the annual period.
New issue domestic CMBS ended 2018 at $91 billion versus year end 2017 volume of $94.1 billion. Year to date 2019 volume is $15.4 billion vs 2018 volume during the same period of $19.4 billion. (Wells Fargo 3.15.19; Commercial Mortgage Alert 3.22.19) Our expectations for 2019 were for an issuance decrease of 10% to 20% due to interest rates and property cash flow dynamics negating the value of refinancing and the complete lack of balloon maturities coming due as CMBS issuance during the years of 2009 and 2010 were non-existent.
Entering 2019, LCAM would like to note that while we seem to have witnessed a V-shaped recovery in the U.S. equity markets from January 2019 to present, interest rates still have not returned to where they were in early November 2018. The yield on the 10-year Treasury today is 2.50% which is 74 basis point lower than its high on November 8th, 2018. We would also note that the 2-year Treasury yield is inverted against the 5-year Treasury yield and the yield curve as mentioned previously is quite flat. T make us more cautious looking forward to the rest of 2019 and what lies ahead for the U.S. economy.
Consistent with its capital preservation objective, the Fund will continue its strategy of investing in CRE debt exhibiting strong fundamental credit metrics while focusing on relative value within each respective transaction’s capital structure. The Fund will also continue to be cautious in respect to credit as the later stages of the current expansion are now defined by a slowing global economy, trade war with China, a possible hard Brexit and a U.S. Federal Reserve that has quickly pivoted from an aggressive schedule of interest rate hikes expected in 2019 to indicating at the most recent FOMC meeting that they do not expect to raise rates during the 2019 calendar year.
The Letter to Shareholders seeks to describe some of the Adviser’s current opinions and views of the financial markets. Although the Adviser believes it has a reasonable basis for any opinions or views expressed, actual results may differ, sometimes significantly so, from those expected or expressed. The securities held by the Fund that are discussed in the Letter to Shareholders were held during the period covered by this Report. They do not comprise the entire investment portfolio of the Fund, may be sold at any time, and may no longer be held by the Fund. For a complete list of securities held by the Fund as of February 28, 2019, please see the Schedule of Investments section of the annual report. The opinions of the Adviser with respect to those securities may change at any time.
Statements in the Letter to Shareholders that reflect projections or expectations for future financial or economic performance of the Fund and the market in general and statements of the Fund’s plans and objectives for future operations are forward-looking statements. No assurance can be given that actual results or events will not differ materially from those projected, estimated, assumed, or anticipated in any such forward-looking statements. Important factors that could result in such differences, in addition to factors noted with such forward-looking statements, include, without limitation, general economic conditions, such as inflation, recession, and interest rates. Past performance is not a guarantee of future results.