NEAM Insights

A historic change will soon be coming to the mortgage-backed securities market. On June 3, 2019, the Federal Housing Finance Authority (FHFA) plans to launch the “uniform mortgage-backed security” (UMBS), a single mortgage-backed security that will be issued by either Fannie Mae or Freddie Mac. The UMBS and the platform supporting it are intended to introduce greater efficiency, improve market liquidity and potentially pave the way for more substantive reforms to U.S. housing finance. Read More

The second quarter of 2018 exhibited a much steadier overall rhythm than the eventful cadence evidenced earlier in the year. Volatility, while still below long-term averages, normalized and enabled the market to return 3.4% in aggregate for the quarter. The market had advanced within 3% of its all-time high by mid-June before trade tensions caused an uptick in volatility and a fade in price momentum. Trade tension also manifested itself in the currency markets as the U.S. dollar strengthened, correspondingly weakening the Euro and many emerging market currencies. The U.S. market fared better than the rest of the world in this backdrop evidenced most notably by China’s Shanghai Composite Index falling into a bear market. Outside of trade, the resurgence in the energy complex impacted market performance. Amid the rally in oil prices, energy finished the quarter as the best performing sector, reversing its laggard position from Q1. Technology continued its leadership role, powered by strong performance in several secular growth names. Read More

Background In late 2014, the Federal Reserve assembled the Alternative Reference Rates Committee (ARRC) and assigned it the task of identifying a new proxy for U.S. Dollar London Inter-bank Offered Rate (Libor) and devising a transition plan to the chosen rate. Read More

Recently, we explored how tax changes have influenced the attractiveness of tax-preferenced investments and the impact of accounting regimes and taxes on rating agency and regulatory solvency assessments.1 This Perspectives addresses the impact of these tax changes on risk tolerances and asset allocation when taxes are explicitly considered in the decision process. Read More

The first quarter of 2018 unfolded with an eventful cadence. Equity price gains accelerated in January as robust earnings revisions and a sharp increase in inflows from retail buyers propelled the market higher. As a result of this momentum, the S&P 500 had posted a gain of over 5% by the end of the month. Read More

The long-run rate of inflation in the U.S. is roughly 3%, yet we haven’t had sustained inflation readings in that range since the mid-1990s. There are many causes for this, not the least of which is the most significant economic downturn in several decades and perhaps since the Great Depression. Still, after nine years of exceptional and stunningly accommodative monetary policy, it’s a bit surprising that central banks are still working toward achieving a 2% inflation rate. Read More

Investors are becoming increasingly concerned about prospects for higher levels of both inflation and interest rates, resulting in the recent spate of volatility and a correction in equity prices (a 10% decline from its 52 week high). Major central banks, led by the Federal Reserve in the United States, have begun to take their collective foot off the gas with regard to the use of their balance sheets to support prices of securities in the capital markets. Investors are asking: how will the reduced buying by major central banks impact the demand for fixed income securities, interest rate levels and the shape of yield curves? Read More

Written in January 2018 Returns for 2017 have been nothing short of spectacular, and records abound. The Dow Jones index recorded 70 plus record highs for the year, surpassing 1995 as the most ever. Similarly, the S&P 500 achieved 62 record highs last year and exhibited the longest streak documented without a 3% pullback.1 The market also exhibited uncanny linearity of returns with each month posting positive total returns for the first time in history.2 Volatility remained well below normal with the Chicago Board Options Exchange Volatility Index (“VIX”) tracking roughly half of its 25-year average. In brief, higher than average gains were achieved with lower than average volatility and greater linearity than is typical for equity risk assets. Correspondingly, using risk adjusted returns as measured by the Sharpe Ratio, returns relative to risk were the third best in history.3 Suffice it to say, it was a record year. Read More

Regulatory and rating agency solvency assessment methods are evolving. A.M. Best is deploying its new capital adequacy model. NAIC Own Risk and Solvency Assessment (ORSA) regulatory documents are being filed by insurers. And, modifications to Solvency II requirements and the adoption of International Financial Reporting Standards (IFRS) are underway. Read More

Municipal Bonds First and foremost, muni bond income remains tax-free at the Federal level for individual investors, as it has been since the Federal personal income tax was established in 1913. Personal income tax rates though were adjusted modestly by the tax act, including a reduction in the highest marginal rate from 39.6% to 37%. From a technical perspective, this should have minimal effect on demand from individual investors who own almost two-thirds of the market. The corporate tax rate reduction (from 35% to 21%), however, increases the attractiveness of taxable bonds relative to tax-advantaged securities for most corporations. This includes banks, credit unions and P&C companies which combined, comprise one-quarter of the market. Conversely, proration rules for life insurance companies were modified, thus increasing the attractiveness of tax-exempts relative to taxables for this historically small segment of the muni market. Read More