Doubleline March 2015 Commentary

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Quarterly Commentary

March 2015

333 S. Grand Ave., 18th Floor || Los Angeles, CA 90071 || (213) 633-8200

Quarterly Commentary
Overview

Inflation remained another focal point during the first
quarter after several consecutive months of weak
commodity prices. Inflation as measured by the
Consumer Price Index (CPI) and Producer Price Index
(PPI) for Final Demand were mixed during March as
oil prices stabilized. The Personal Consumption
Expenditures (PCE) Deflator, a measure used by the
Fed to monitor a wide range of spending, was up just
0.3% year-over-year (YoY). Excluding food and energy,
the Core PCE was up 1.4% YoY, well short of the Fed’s
2% inflation mandate.
Growth expectations have also been on close watch
as the Bureau of Economic Analysis (BEA) released
their third estimate of gross domestic product (GDP)
for the fourth quarter of 2014. According to the BEA,
GDP expanded by 2.2% as exports and PCE drove
growth. For the full calendar year 2014, GDP grew
2.4%. According to the Conference Board, growth is
expected to increase at an annualized rate of 2.8%
during 2015.

8.00%

Quarter-over-Quarter Real GDP Growth Estimates
2014Q4 Growth = 2.20%

6.00%
4.00%
2.00%
0.00%

-2.00%
Advance
-4.00%

Second

-6.00%

Third

-8.00%

Latest

-10.00%

Source: Bureau of Economic Analysis, Bloomberg

included a downward revision totaling 69,000 as
nonfarm payrolls grew less than initially reported
during January and February.
Nonfarm Private Payrolls - Net Change
450
400

Net Payroll Additions (000's)

Central Bank policy remained a focus during the first
quarter of 2015 as market participants continued to
look for any signs of a rate hike in the U.S. As a result,
particular attention was given to the Federal Open
Market Committee (FOMC) minutes released during
March and as many expected, the word “patient” was
omitted when providing forward guidance. The move
is expected to provide the Fed with additional
flexibility. It is worth noting that several FOMC
members emphasized caution citing weaker growth
and lower inflation forecasts which were recently
downgraded beyond 2015.

BLS
ADP

Last BLS = 189K
Last ADP = 126K

350
300
250
200
150
100
50
0

Source: Bureau of Labor Statistics, Bloomberg, ADP

The unemployment rate held steady at 5.5% while
the underemployment rate (U-6) fell to 10.9% from
11.0% during February. The Labor Force Participation
Rate fell to 62.7% from 62.8% the month prior.
Underemployment/Unemployment Rate
16.0%

Unemployment Rate
Underemployment Rate

14.0%

Last Unemployment = 5.5%
Last Underemployment = 11.0%

12.0%
10.0%
8.0%
6.0%
4.0%

One of the most disappointing figures for the quarter
came in the March nonfarm payrolls figure. According
to the Employment Situation Summary, total nonfarm
payrolls increased by 126,000 during March, marking
the lowest gain since December 2013. The figure also

2.0%
0.0%

Source: Bureau of Labor Statistics, Bloomberg

2
Quarterly Commentary 3/31/15

Quarterly Commentary
It was against this challenging backdrop that risk
assets were mixed through the first quarter. U.S.
equities as measured by the S&P 500 Index fell 1.58%
during the month but are still positive for the year.
The Barclays U.S. Aggregate Bond Index was up 0.46%
during March and is up 1.6% year-to-date (YTD).

3
Quarterly Commentary 3/31/15

Quarterly Commentary
Emerging Markets Fixed Income
In Emerging Markets Fixed Income (EMFI), the three
sectors of the market – the external sovereign,
corporate debt and local currency bonds, represented
by the JP Morgan Emerging Markets Bond Index
Global Diversified (EMBI), the JP Morgan Corporate
Emerging Markets Bond Index Broad Diversified
(CEMBI) and the JP Morgan Government Bond Index
Emerging Markets Broad Diversified (GBI-EM),
respectively – posted mixed returns for March and
the first quarter.

4.0%
3.0%
2.0%

JP Morgan Emerging Markets Bond Index Performance
3/31/2014 to 3/31/2015
EMBI
CEMBI
GBI-EM

1.0%
0.0%
-1.0%
-2.0%
-3.0%
-4.0%
-5.0%
-6.0%

Source: JP Morgan

The month of March saw uneven performance in risk
assets. U.S. equities, as measured by the S&P 500
Index, fell 1.58% in March, but still ended the first
quarter up 0.95%. Outside the U.S., foreign equities
fared better in March. Over the month, German
stocks notched strong gains amid continued tailwinds
from the European Cental Bank’s (ECB) bond-buying
program, while mainland Chinese stocks jumped
double-digits as investors priced in potential
government stimulus measures. Commodities prices
broadly fell over the month: gold declined -2.43% in
March, spot iron ore fell over -9%, and Brent crude oil
shed nearly -13%. 10-year U.S. Treasuries (UST) rallied
for much of the month of March and the quarter,
with yields falling to 1.92% on March 31, 25 basis

points (bps) tighter from December month-end.
For the quarter, EM sovereign bonds as represented
by the EMBI, returned 2.01%. By comparison, EM
corporate debt as represented by the CEMBI returned
2.36% for the quarter, while the strong USD
hampered EM local currency debt which shed -2.99%.

In Europe, March saw a continuation of trends that
occurred for much of the quarter due to the ECB’s
quantitative easing (QE) program. All G10 currencies
were weaker versus the USD in March, with the Euro
itself falling 4.15% to bring its first quarter decline to
11.3%. Concurrently, European equities generally
rallied, with Morgan Stanley Capital International
(MSCI) Europe Index gaining 1.79% for March,
bringing its three-month return to a robust 22.38%.
The ECB officially began its long-awaited stimulus
program on March 9, buying nearly 60 billion euros
worth of covered bonds and asset-backed securities
(ABS) by the end of March. The tense, stop-and-start
austerity negotiations between Greece and the Troika
(European Commission, ECB, and International
Monetary Fund (IMF)) remain a near-term headwind
for Europe.
In China, March witnessed local equities push again to
multi-year highs not seen since 2008. The Shanghai
Stock Exchange Composite Index soared 15.88% over
the first quarter, with a strong gain of 13.22% in
March being the main driver. China equities rallied
starting March 9 as Premier Li Keqiang stated that the
government has “fairly ample room” to act in
deploying fiscal stimulus to support the Chinese
economy, as he also lowered the 2015 forecast for
growth to about 7.0% from 7.5%. The official
manufacturing Purchasing Managers Index (PMI)
reported modest expansion in the sector with a 50.1
4
Quarterly Commentary 3/31/15

Quarterly Commentary
reading, the first month of expansion in 2015. Still,
HSBC’s private PMI Index, which generally reflects
smaller-to-medium-size firms, showed contraction in
manufacturing for March. The Chinese government
has also taken steps toward liberalization of interest
rates and foreign investor access to local markets,
and the state council approved the creation of
deposit insurance.

total inflows to $7.84 billion. In contrast, local currency
funds saw their first monthly outflow of 2015 in
March, losing $880 million. Still, for the first quarter
local denominated funds had $2.48 billion in inflows.

Elsewhere in emerging markets, performance was
mixed but with the stronger USD and weaker
commodity complex continuing to be macro themes.
The Russian ruble was one of the strongest
performing EM currencies in March, gaining over 6%
versus the USD and bringing first quarter gains to
4.38%, one of a handful of EM currencies stronger
versus the USD. Volatility in the ruble has dropped
significantly in the currency since January amid the
Minsk agreement ceasefire that has tentatively
avoided large-scale bloodshed in eastern Ukraine.
There are still a number of macro headwinds for
Russia, such as inflation which increased 16.9% (YoY)
in March and a looming recession. Neighboring
Ukraine and the IMF agreed on an aid package worth
$40 billion ($17.5 billion direct from the IMF) on
March 11. The Ukrainian hryvnia has strengthened
significantly from a steep low of 33.75 per USD in late
February, ending March at 23.44 per USD. On the
other end of the spectrum, the Brazilian real had a
very tough first quarter, weakening by nearly 17%
versus the USD. A corruption scandal continues to
engulf the state-owned energy giant Petrobras, as
well as a number of construction firms and politicians.
Fourth quarter GDP unexpectedly rose 0.3% quarterover-quarter (QoQ) in a March release, but getting a
more balanced fiscal budget remains a key concern,
with an unexpected primary deficit of 2.3 billion reais
being reported for February.
The month of March witnessed $3.43 billion inflows
into hard currency EMFI funds, bringing first quarter

5
Quarterly Commentary 3/31/15

Quarterly Commentary
Agency Mortgage-Backed Securities
For the month of March 2015, the Barclays U.S. MBS
Index returned .37% while the Barclays U.S.
Government Index returned close to .61%. The yield
curve slightly flattened with intermediate-term rates
declining the most. U.S. 10-year yields declined by
about 7 bps while 2-year yields declined by about 6
bps. The Barclays U.S. MBS Index’s duration
shortened from 3.73 to 3.54 while the Barclays U.S.
Government Index ended the month with a duration
closer to 5.51. Total applications for refinancing and
overall refinancing activity (based on Mortgage
Bankers Association (MBA) Refinancing and
Applications for Refinancing Indices) ticked upwards
month-over-month
(MoM),
while
aggregate
prepayment speeds also increased.

Duration of Barclays U.S. MBS Index
7.00
6.00

3/31/2015
3.54

5.00
4.00
3.00
2.00
1.00
0.00

Source: Bloomberg

Conditional Prepayment Rates (CPR)
2014 - 2015
Apr
May
Jun
Fannie Mae (FNMA)
9.9%
10.4%
11.7%
Freddie Mac (FHLMC)
10.2%
10.8%
11.8%
Ginnie Mae (GNMA)
12.8%
13.8%
14.8%
Barclays Capital U.S.
MBS Index
1/31/2015 2/28/2015 3/31/2015
Average Dollar Price
$106.61
$106.18
$106.35
Duration
3.20
3.73
3.54
Barclays Capital U.S.
Index Returns
1/31/2015 2/28/2015 3/31/2015
Aggregate
2.10%
-0.94%
0.46%
MBS
0.85%
-0.16%
0.37%
Corporate
2.83%
-0.99%
0.35%
Treasury
2.59%
-1.54%
0.63%

Jul
12.2%
12.2%
15.1%

Aug
11.4%
11.6%
14.6%

For the quarter ending March 31, the Barclays U.S.
MBS Index returned 1.06% while the Barclays U.S.
Government Index returned 1.60%. The yield curve
continued its flattening trend with longer-term rates
declining over the trailing 3-month period. U.S 10year yields declined by 25 bps while U.S. 2-year yields
declined by 11 bps; additionally, U.S. 3-month LIBOR
rates increased by about 1.5 bps. The Barclays U.S.
MBS Index’s underperformance was largely due to
the sector’s lower duration profile against longerterm U.S. yields broadly declining for the period.
During this time, the Barclays U.S. MBS Index’s
duration shortened from 4.34 to 3.54, with the
Barclays U.S. Government Index ending with a
duration of 5.55.
Prepayment speeds across all agencies (Fannie Mae,
Freddie Mac, and Ginnie Mae) increased quarter-over
-quarter (QoQ) with aggregate Fannie Mae CPR
(Conditional Prepayment Rates) increasing from 12.6
to 17.6, Freddie Mac CPR increasing from 12.7 to
18.2, and Ginnie Mae CPR increasing from 16.5 to
24.5. The increase in prepayment activity was largely
caused by improving housing seasonality as we enter
into the spring months, lower 30-year mortgage
rates, and the reduction in FHA (Federal Housing
Administration) mortgage insurance premiums (MIP)
Sept
11.3%
11.2%
14.6%

Oct
11.3%
11.7%
14.8%

Nov
10.8%
11.3%
15.3%

Dec
12.6%
12.7%
16.5%

Jan
11.0%
11.3%
13.8%

Feb
14.3%
14.8%
20.4%

Mar
17.6%
18.2%
24.5%

Change
$0.17
-0.19

source: eMBS, Barclays Capital
ABX & PrimeX 3 month charts - source: Morgan Stanley
FHLMC Commitment Rate - source: Bloomberg

6
Quarterly Commentary 3/31/15

Quarterly Commentary
enacted at the end of January. The large decline in 30year mortgage rates (based on Freddie Mac 30-year
Survey Commitment Rates) of approximately 20 bps
for the month of January resulted in a spike in
refinancing activity for the first half of the quarter.
Similarly to the previous quarter, much of the
prepayment activity focused around the lower, more
recent production coupons such as 3.5s to 4.5s. This
doesn’t come as a surprise as the newer pools have
had less burnout with more of the underlying
borrows becoming more incentivized to refinance
given the local lows in mortgage rates at the
beginning of the year.

Mortgage Bankers Association (MBA) Refinance Index
7,000.00
6,000.00
5,000.00
4,000.00
3/27/2015
2008.7

3,000.00
2,000.00
1,000.00
0.00

Source: Bloomberg

Mortgage Bankers Association (MBA) Purchase Index
240.00

220.00

3/27/2015
188.9

200.00

Throughout the quarter, total gross issuance of
Agency residential MBS was $90 billion, $93 billion,
and $105 billion for the month of January, February,
and March, respectively. The growing issuance
volume throughout the quarter was consistent with
increasing prepayment speeds during the period.
Total issuance for the quarter was almost 50% higher
compared to last year’s first quarter figures.

180.00

160.00

140.00

120.00

Source: Bloomberg

On the regulatory front, the most significant news
came at the beginning of the quarter with the
announcement by President Obama and the
Department of Housing and Urban Development
(HUD) on the reduction of FHA MIP by 50 bps. This
reduction impacted the securitized market by
incentivizing more borrowers to refinance their
mortgages due to their lower annualized cost basis.
As a result, prepayment speeds have increased within
Ginnie Mae pools (where most FHA loans reside in)
since the end of January when the reduction came
into effect.

7
Quarterly Commentary 3/31/15

Quarterly Commentary
Non-Agency Mortgage-Backed Securities
Non-Agency MBS market started out 2015 slow but
trading volume has progressed steadily coming into
the end of the first quarter, with a pick-up in trading
activity during March. Hedge funds were the biggest
sellers with buying activity being concentrated within
insurance companies and money managers. Hedge
fund redemptions, portfolio re-positioning and
Government Sponsored Enterprise (GSE) liquidation
lists all contributed to the selling volume for the
quarter with the majority of buying activity being
concentrated within insurance companies and money
managers. Subprime collateral was the largest traded
sector by volume in March. During the month,
subprime accounted for approximately $5.7 billion of
traded current face with prime and Alt-A accounting
for $1.2 and $2.1 billion respectively. Loss-adjusted
yields have remained consistent throughout the first
quarter as supply for non-Agency MBS have been met
with equivalent demand for the product. Prime
collateral traded at loss-adjusted yields of
approximately 3.75% to 4%, Alt-A from 4% to 4.25%
and subprime collateral in the 4% to 6% range
depending on weighted average life profile. Lossadjusted yields remained consistent with Prime bonds
trading in the 3.75% to 4% range, Alt-A bonds in the
4% to 4.25% range and subprime in the 4.5% to 6%
range depending on weighted average life (WAL)
profile.
ABX Prices
90

80

ABX 2006-2 AAA
ABX 2007-1 AAA

3/31/2015
80.29

70

60

3/31/2015
75.25

For March, mortgage fundamentals have been
consistent and prepayment speeds, liquidation rates
and severities have been range bound. Legacy nonAgency prepayment speeds were also essentially
unchanged with average speeds on prime, Alt-A and
subprime collateral coming in at 11.9 CPR, 5.5 CPR
and 3.3 CPR, respectively. Prepayment speeds
increased marginally during the quarter overall as
falling interest rates increased refinancing activity.
The pace of loan modifications was steady during
March with principal modifications making up 12% of
total monthly loan modifications, resulting in an
average principal balance reduction of $88,000. Rate
modification resulted in an average rate drop of
2.63%. Default liquidations speeds picked up slightly
across all sectors for the first quarter, while loss
severities remained stable throughout.
Loan
modifications continued to be prevalent with
approximately 1600 loans being modified each month
with rate modifications still accounting for the lion
share of all rate modifications.
Ocwen Financial Corporation has been facing
increasing scrutiny over allegations of unfair servicing
practices and during the past quarter, Ocwen sold a
portion of their loan servicing book to Nationstar
Mortgage Holdings. In February of 2015, Ocwen sold
$10 billion of loan servicing rights followed by
another $25 billion of servicing rights in March.
Rumors continue to persist that Ocwen will seek to
sell more of its loan servicing book in the months to
come.

50

40

30

8
Source: Markit via Morgan Stanley

Quarterly Commentary 3/31/15

Quarterly Commentary
Investment Grade Credit
Investment grade corporate bonds as measured by
the Barclays U.S. Credit Index returned 2.16% during
the first quarter as performance was mainly driven by
a decline in long-term interest rates. Against this
backdrop, the Barclays U.S. Credit Index ended the
month 5 bps wider generating a monthly total return
of 0.35%. For the first quarter, spreads were
unchanged generating a 3-month total return of
2.16% and outperforming duration-matched UST by
17 bps.
4.0%

Performance of Select Barclays Indices Last 12 Months
3/31/2014 to 3/31/2015
Barclays U.S. High Yield Index

3.0%
2.0%

Barclays U.S. Credit Index
Barclays U.S. Aggregate Index

1.0%
0.0%
-1.0%
-2.0%
-3.0%

Mining has been a reoccurring theme as weaker
global demand has led to falling prices.
There was not a major divergence in performance by
credit quality during March as BBB-rated and A-rated
spreads widened by 5 bps and 7 bps, respectively. As
a result, both credit qualities underperformed relative
to UST. For the quarter, BBB-rated and A-rated
spreads tightened slightly generating an excess return
of 36 bps and 23 bps respectively.
The major topic in the investment grade space for
March was the record issuance that came to market.
Fixed-rate gross investment grade supply for March
was $155.3 billion, marking one of the highest
months on record. The supply was led by Industrials
which issued $72.4 billion of investment grade debt.
Financials followed issuing $41.1 billion in debt. Fixedrate gross investment grade supply came in at a
strong $379 billion for the quarter and appears to be
on track for a record year.

Source: Barclays Live

160
140

Billions of U.S. Dollars

Taking a look at performance by sector showed that
defensive and story-related sectors outperformed for
the month. The leaders for March included Cable
Satellite (29 bps), Lodging (7 bps) and Supranationals
(5 bps). The Cable Satellite sector was the perfect
example of a story-related name as Time Warner
Cable bonds jumped following the announcement of
a delay in the Comcast/Time Warner Cable merger.
For the quarter, Energy-related names were the real
winner as relatively stable oil prices led to a rebound
in certain sectors. As a result, the top sectors included
Refining (244 bps), Independent Energy (154 bps),
Airlines (140 bps) and Integrated Energy (117 bps).
The worst performing sectors for the quarter were
Metals and Mining (-74 bps), Oilfield Services (-66
bps), Industrial other (-54 bps), Packaging (-52 bps)
and Sovereign (-48 bps). The weakness in Metals and

Total Fixed-Rate Investment Grade Supply
180

120
100
80
60
40
20
0

Source: Barclays Live

9
Quarterly Commentary 3/31/15

Quarterly Commentary
High Yield
The High Yield market was bifurcated during March as
consumer-driven segments outperformed the more
volatile commodity-linked sectors. The high yield
market as measured by the Citi High-Yield Cash-Pay
Capped Index fell 0.63% during March, ending the
quarter up 2.34%. Performance was led by Food
Processors/Beverage/Bottling industry which led all
sectors posting a gain of 2.19% and 5.33%, respectively.
The bottom performers for the month included
Secondary Oil & Gas Producers and Metals/Mining. In
general, investors preferred higher-quality paper
during March and the first quarter as high quality
credits outperformed their lower rated counterparts.
After the pullback in March, the Index’s yield-to-worst
was at 6.29% on March 31, tightening 38 bps for the
quarter. The spread-to-worst tightened 19 bps to 503
bps for the first quarter.
Top-Performing Industries MTD* as of 3/31/2015
Food Processors/Beverage/Bottling
Home Builders
Retail - Food and Drug
Building Products

2.19%
0.93%
0.62%
0.60%

Top-Performing Industries YTD** as of 3/31/2015
Food Processors/Beverage/Bottling
Retail - Food and Drug
Tower
Leisure

5.33%
4.67%
4.09%
4.02%

Bottom-Performing Industries MTD as of 3/31/2015
Secondary Oil & Gas Producers
Metals/Mining
Industrial - Other
Oil Equipment

-3.52%
-3.46%
-1.54%
-1.29%

Bottom-Performing Industries YTD as of 3/31/2015
Metals/Mining
Aerospace
Banking
Textile/Apparel/Shoe Manufacturing

-1.19%
-0.03%
1.42%
1.45%

with new-issue volume rising to $40.1 billion during
March. The increase was highlighted by the $9.1
billion issue by Valeant Pharmaceuticals where
proceeds were set aside for the purchase of Salix
Pharmaceuticals. Including March, new issue volume
totaled $95.6 billion, which is now ahead of last year’s
pace of $88.3 billion.
From a technical perspective, investors appeared
more cautious during March as the strong inflows
experienced during January and February tapered off.
High yield mutual funds and ETFs finally saw outflows
during March. Although minor, outflows totaled $0.8
billion during March as investors weighed oil prices
and the direction of rates.
A closer look at defaults during the March shows that
only one company defaulted (Dune Energy), affecting
just $68 million of high-yield bonds. The amount is
considered trivial given the size of the market.
Including Dune Energy, a total of 4 companies
defaulted during the quarter which equates to a total
of just over $2.9 billion in bonds. As a result, the parweighted U.S. high-yield default rate declined slightly
to 3.00% as of March 31. One year ago, the default
rate was just 0.61%, as TXU later defaulted. The
default rate is expected to fall next month when TXU
is removed from the calculation. The more stable
issuer-weighted default rate decreased month-overmonth to 1.65%, and is down from 1.86% in March of
last year.

Source: S&P Capital IQ Leveraged Commentary and Data (LCD)
*MTD = month-to-date
**YTD = year-to-date

Similar to investment grade corporates, the major
theme remains rooted around the health of the new
issue market. The new issue market remained red hot,

10
Quarterly Commentary 3/31/15

Quarterly Commentary
Bank Loans
Bank loans continued their strong start to the year as
the S&P/LSTA Leveraged Loan Index posted a 0.37%
gain for the month of March. These gains come on
the heels of a strong February which showed the
largest monthly total return since January 2012. For
the first quarter of 2015, the Index gained 2.13%.
Strength in the loan market can partially be attributed
to a strong technical environment as inflows from
CLO formation and retail funds exceeded net new
supply by $18.1 billion. This figure marked the biggest
technical surplus on record as the market remains
supply constrained. Institutional loan volume totaled
$23.1 billion during March bringing year-to-date
issuance to $56.4 billion. This figure remains well
below the $128.5 billion seen during the first quarter
of 2014. The decline in volume can partially be
attributed to a decline in refinancing activity which
made up for just 30% of loan activity during March
and just under 10% for February.
Top-Performing Industries MTD* as of 3/31/2015
Food Service
Electronics - Electrical
Food and Drug Retailers
Retailers (Not Food and Drug)

0.88%
0.85%
0.82%
0.81%

Top-Performing Industries YTD** as of 3/31/2015
Leisure Goods-Activities -Movies
Cosmetics - Toiletries
Containers and Glass Products
Retailers (Not Food and Drug)

3.01%
3.01%
2.93%
2.90%

Bottom-Performing Industries MTD as of 3/31/2015
Oil and Gas
Utilities
Forest Products
Nonferrous Metals - Minerals

-1.39%
-0.91%
-0.66%
-0.45%

bid. As of March end, the average bid price of the
S&P/LSTA Leveraged Loan Index was at $96.98 and is
up 1.06 points for the quarter despite a slight
decrease during March. The loan Index’s yield-tomaturity (YTM) increased 1 bp to 5.18% during the
month of March while the discounted spread to a 3year life remained unchanged relative to February at
LIBOR +518 bps.
The positive performance during March was led by
the Food Service sector which was up 0.88% following
news of the Kraft-Heinz merger which boosted prices.
Electronics (+0.85%) and Food & Drug Retailers
(+0.83%) were also strong performers. On the other
side of the equation, Oil & Gas (-1.39%), Utilities (0.91%), and Forest Products (-0.66%) were all weaker.
For the quarter, the top performing industries
included Leisure Goods & Services (3.01%), Cosmetics
(3.01%), and Containers (2.93%). The bottom
performing industries for the quarter were
Nonferrous Metals (-1.81%), Utilities (-0.38%), and Oil
& Gas (0.16%).
There were two defaults during March which equated
to approximately $800 million. The two companies
that defaulted were Quicksilver Resources ($625
million) and Chassix ($175 million). Despite the
defaults, the trailing 12-month issuer-weighted
default rate decreased 13 bps to 0.61% as the $950
million QCE/Quiznos default in March 2014 rolled out
of the calculation.

Bottom-Performing Industries LTM as of 3/31/2015
Nonferrous Metals - Minerals
Utilities
Oil and Gas
Food Service

-1.81%
-0.38%
-0.16%
0.01%

Source: S&P Capital IQ Leveraged Commentary and Data (LCD)
*MTD = month-to-date
**YTD = year-to-date

The demand for paper has certainly carried over to
the secondary market where prices also remain well

11
Quarterly Commentary 3/31/15

Quarterly Commentary
Collateralized Loan Obligations (CLOs)
Collateralized Loan Obligations (CLOs) continued to
pick up steam in the first quarter of 2015 with 54
deals pricing for a total $29.33 billion. March was the
strongest issuance month so far this year with $14.7
billion across 27 deals coming to market and also beat
the highest monthly issuance in 2014 which was set in
June at $13.78 billion. Issuance in the first quarter of
2015 was roughly $6.7 billion ahead of issuance in the
first quarter of 2014 and on par with issuance for the
first quarter of 2013. 2014 issuance was hampered by
the announcement of the Volcker Rule. 2015
experienced similar headwinds in January as the
market tried to create solutions for risk retention.
Issuance ramped up quickly after January as many
managers wanted to issue deals ahead of
implementation of regulation.
Spreads continued to tighten over the first quarter.
Mezzanine tranches experienced the most tightening
with single As and BBBs coming in by roughly 30 bps
over the quarter. AAAs and AAs came in by 10 and 25
bps, respectively. This spread compression happened
mostly in February, with spreads remaining firm in
March.
Roughly 13% of the deals priced this month are
compliant with Euro Risk Retention regulation. Issuing
U.S. deals that are Euro Risk Retention compliant
allows the managers to issue at tighter spreads than
non-Euro compliant deals since these deals are able
to reach more investors. Another positive note of
issuing a U.S. deal that is Euro compliant is it allows
managers to show they have viable options to stay in
the sector after U.S. Risk Retention goes into effect in
December 2016. For the quarter, $3.88 billion of all
the CLOs issued this quarter were compliant with
Euro Risk Retention.
12
Quarterly Commentary 3/31/15

Quarterly Commentary
Commercial Mortgage-Backed Securities
The Barclays U.S. CMBS Index returned 0.63% for
March and 1.77% for the first quarter of 2015,
outperforming the broader aggregate by 16 bps for
both March and the first quarter. CMBS spreads were
mixed for the month of March, as falling UST rates led
to tighter all in yields and mostly tighter spreads;
however, some parts of the capital stack saw
weakening as investors pulled back when returns
were not meeting minimum yield hurdles. For the
month, new issue AAA widened by 1 bps to swaps
+85 bps and BBB- tightened by 3 bps to swaps +345
bps while legacy last cash flow (LCF) bonds tightened
by 4 bps to swaps +86 bps. CMBS spreads were
tighter for the quarter, despite economic turmoil in
Europe throughout January, in addition to widening
UST in February. For the quarter, new issue AAA
tightened by 3 bps to swaps +85 bps and BBBtightened by 13 bps to swaps +345 bps, while legacy
LCF bonds tightened by 2 bps to swaps +86 bps.

rates while lodging, the top performing property
sector, saw its delinquency decrease by 31 bps to
4.20%; office saw its delinquency rate improve by 8
bps to 6.06%. The industrial sector saw its
delinquency rate increase by 29 bps to 7.68%;
multifamily saw an 8 bps increase in its delinquency
rate to 8.73%, the highest among the five major
property sectors, and retail delinquency jumped 13
bps to 5.51%. The Moody’s/RCA Commercial Property
Price Indices (CPPI) National Major Markets
Composite Index increased 1.34% in February 2015
while Non-Major Markets improved by 1.57%. March
loan loss severities averaged 36% on $530 million of
outstanding loans liquidated.
Moody's/RCA Commercial Property Price Indices
12/31/2000 - 2/28/2015
300.00

Major Markets (All-Property)

2/28/2015
239.28

250.00

Non-Major Markets (All-Property)
200.00
150.00

The 2015 CMBS market remains on track to set a post
-crisis new issuance volume record. The March new
issue calendar consisted of twelve deals totaling $8.4
billion brought to market. Of the twelve deals, four
were fixed-rate conduit transactions, totaling $4.4
billion of issuance. Private label CMBS issuance
finished the quarter at $24.7 billion, 15% higher than
fourth quarter 2014, 30% higher than first quarter
2014, and the second highest quarterly issuance since
the end of the financial crisis trailing only $26.3 billion
in third quarter 2014. The rise in issuance was driven
by SASB (single asset single borrower), which more
than doubled YoY while conduit issuance declined
11% compared to the same period last year.
The overall U.S. CMBS delinquency rate was
unchanged at 5.58% in March, according to Trepp
Analytics. For the month, the industrial, multifamily
and retail sectors saw an increase in delinquency

100.00

2/28/2015
158.64

50.00
0.00

Source: Moody's Investor Service, Real Capital Analytics (RCA)

13
Quarterly Commentary 3/31/15

Quarterly Commentary
Commodities
In the first quarter of 2015 the broad commodities
markets returned -8.22% as measured by the S&P
GSCI (Goldman Sachs Commodity Index) and -5.95%
as measured by the Bloomberg Commodity Index
(BCOM). Commodities continue to be in a bear
market and this was indicated by four of the five
sectors being negative in the first quarter of 2015.
Precious metals was the only sector to achieve a
positive return; though gold ended down 24 bps in
the quarter, silver rallied 613 bps leading the sector
to a 44 bps increase. Crude oil price fluctuations
continued to be a key driver of volatility in the
commodity world, as indices traded down with it in
January, rallied back with it February before giving
way again in March. This is illustrated by the fact that
the BCOM displayed lower volatility than the S&P
GSCI due to a lower percentage exposure to the
energy sector, but still traded down as energy fell.
As mentioned above, the precious metal sector (+44
bps) displayed high dispersion as gold fell 24 bps
while silver increased over 613 bps. Gold is likely to
be sensitive to inflation, the Federal Reserve funds
rate and global contagion fears going forward. If the
U.S. economy performs well in the face of higher
short-term treasury rates and inflation remains
muted gold prices could fall. On the other hand, if
the business cycle turns south or global fears
flashpoint then gold could increase.
The industrial metals lost 5.09% as weak demand
from China and depreciating (relative to the USD)
producer currencies has weighed on prices. Nickel
was the weakest performer, losing 18.54% in the first
quarter. The bellwether copper was down 3.74%
while inventories have increased – indicating a supply
surplus in the market. Other key industrial metals fell
as well with aluminum (-4.04%), zinc (-4.93%) and
lead (-2.34%) all ending down.

The agricultural sector saw large declines across the
board with the sector down 9.68% in the first quarter.
Grains saw declines in corn, wheat and soybeans with
wheat losing the most at -13.21% in the first quarter
of 2015. Softs were more scattered as the worst
performer, coffee, was down 21.59% while cotton
performed the best returning 4.25%. One potential
avenue for a price recovery is if adverse weather
conditions arise that impact future expected crop
yields, hence weather over the summer should be a
determinate of prices for the rest of the year.
The livestock sector was down 7.12%, as lean hogs fell
23.75% due to lack of supply constriction; fears of
viral outbreak and low litter sizes were unconfirmed
by data. Live cattle and feeder cattle were split, with
live cattle down 77 bps and feeder cattle up 61 bps.

The energy sector was down 8.86% in the first
quarter. Gasoil (diesel distillate) and Reformulated
Blendstock for Oxygenate Blending (RBOB) unleaded
gasoline had gains as the annual refinery shutdown
period decreased supply (up 1.14% and 1.69%
respectively), while the rest of the energy complex
had losses across the board. WTI crude was down the
most, losing 16.41%, as record U.S. supplies and a
large current inventory went untapped as demand
has lagged supply growth. Brent crude also fell,
ending down 8.94%, as geopolitical risk premia kept
prices slightly higher; a potential breakdown in
Iranian nuclear talks and conflict on the Arabian
Peninsula offer avenues for major Middle Eastern
supply disruptions. Heating oil was down 2.18%.
Natural gas fell 10.20% as supply remains above 72
billion cubic feet per day (bcf/d) but rig counts have
fallen, and supply could decrease over the next 6-12
months as currently producing wells dry out.
14
Quarterly Commentary 3/31/15

Quarterly Commentary
U.S. Government Securities
The UST market was unsettled in March, as a sharp sell
-off began the month in the wake of another stronger
than expected employment report. February job
creation – a 295k increase in non-farm payrolls – was
well above the consensus forecast of 235k. The 10year UST yield closed at 2.24% on March 6, the highest
since December 2014. A rally began on the next
trading day as the ECB launched its bond buying
program in Europe and low and falling European
sovereign yields and a strengthening dollar gave
support to Treasuries. The rally accelerated through
March 18, the day of the FOMC rate decision. As
expected the FOMC removed “patient” from its
statement, opening the possibility of a June rate hike.
Unexpected, though, was the decisive downward
revision to FOMC members’ forecast of growth and
inflation, as well as the “dots” indicating the members’
expectations of the pace of policy tightening. The
downgraded economic outlook prompted an 11 bps
rally by the 10-year Treasury. UST moved sideways for
the remainder of the month amid generally weaker
than expected economic data.
Treasury yields were lower at the conclusion of the
month’s gyrations. Yields on intermediate UST fell the
most, as is typical when economic forecasts are
revised lower. The 5-year UST yield fell 13 bps. The 2year and 10-year yields both fell 7 bps. The Barclays
U.S. Government Index returned 0.61% in March.

Yield Curve
3 month
6 month
1 year
2 year
3 year
5 year
10 year
30 year
Source: Bl oomberg

2/28/2015
0.01%
0.07%
0.19%
0.62%
1.00%
1.50%
1.99%
2.59%

3/31/2015
0.02%
0.14%
0.23%
0.56%
0.88%
1.37%
1.92%
2.54%

Change
1.00%
0.07%
0.04%
-0.06%
-0.12%
-0.13%
-0.07%
-0.05%

Longer maturity issues provided the best returns,
with the 30-year bond returning 1.42% compared to
0.80% for the 10-year note and 0.22% for the 2-year
note. Treasury Inflation-Protected Securities (TIPS)
returned -0.47%, weighed down by falling inflation
expectations.
Municipal bonds also lagged
Treasuries, with the Barclays U.S. Municipal Bond
Index returning 0.29% in February as increased supply
weighed on the market.
The Treasury market was filled with wild swings and
reversals in the first quarter. The year began with
one of the strongest January performances on record.
The market turned on a dime and gave virtually the
entire January gain in February, while March was a
mixed bag. Net, yields were lower at quarter-end,
with the largest yield declines in intermediate
maturities. The 5-year UST note yield fell 28 bps
through the quarter, while the long bond yield fell 21
bps and the 2-year yield fell 11 bps. Long issues
returned the most, led by the 5.05% return on the 30year bond.
TIPS and munis both fell behind
Treasuries, returning 1.42% and 1.01%, respectively.
The Treasury market entered a new phase in the
quarter. Fed policy still sets the tone for the Treasury
market, but, unlike recent past years, the near-term
outlook for Fed policy is unclear. FOMC statements
now offer little insight into the course of policy, as the
mixed economic data, policy divergence between the
Fed and other central banks, disagreements within
the FOMC and the Fed’s efforts to afford itself
increased flexibility have robbed the Fed’s statements
of any substance.

15
Quarterly Commentary 3/31/15

Quarterly Commentary
U.S. Equities
With an absence of meaningful corporate earnings
news, the direction of the USD took center stage in the
equity markets in March. Earlier in the quarter, in
January the three factors (all non-equity) which
dominated the equity market since mid-2014
continued to hold majority sway: falling oil prices,
falling Treasury yields, and the strengthening dollar.
Both oil and the USD had been essentially onedirectional trades since July, and January saw yields on
the 10-year UST fall to levels not seen since the 2013
“Taper Tantrum”. Mid-March, the USD Index briefly
traded above $100, a level last seen in 2003.

coming from volume and 0.4% coming from price
increases. This paints a picture that is very consistent
with macroeconomic data: very little inflation (and
therefore pricing power) and slow but positive
volume growth. It seems we remain in a lackluster
economy. Of note, margin expansion contributed 2.1
percentage points to earnings per share (EPS) growth.
This is the growth factor we find most at risk,
especially if the U.S. economy starts (finally) to see
meaningful wage growth.

Within equities, small cap stocks significantly
outperformed the large capitalization benchmarks.
For the month of March, the S&P 500 Index lost almost
1.6%, while the Russell 2000 Index gained over 1.7%.
This outperformance by small caps is consistent with
the lower exposure of smaller companies to non-USD
revenue sources.
Within the S&P 500, sector performance was also
closely tied to currency exposure for March. The best
performing sectors were those most tied to the
domestic U.S. economy – specifically Healthcare and
Consumer Discretionary. Healthcare was the only
sector of the S&P 500 to post positive returns in
March, gaining less than 1%. The Materials sector was
the worst performing sector in the month, losing
almost 5%. Given the collapse in commodity prices, in
retrospect this performance is not surprising.
Industrials and Technology, both sectors with
significant exposure to non-U.S. markets, were also
weak. Within the S&P 500 Technology lost 3.3% and
Industrials lost 2.6%.
Revenue growth continued to be tough for
corporations to find during the first quarter as a
whole. Total revenue growth was only 2.4%, with 2.0%

16
Quarterly Commentary 3/31/15

Quarterly Commentary
Global Equities
Global equities as measured by the MSCI All Country
World Index (ACWI) declined 1.78% in March but
ended the first quarter up 1.83%. U.S. equities were
generally lower during the month with the S&P 500
Index and Dow Jones down 1.74% and 1.97%,
respectively. The Nasdaq and Russell 2000 Index were
mixed during the month of March, with the former
down 1.26% and the latter up 1.57%. Despite the weak
March performance, U.S. equities posted mixed
returns for the quarter with the S&P 500 up 0.44%,
Dow Jones down 0.26%, Nasdaq up 3.48%, and
Russell 2000 up 3.99%. The macro data out of the U.S.
was mixed with better than expected jobs data;
however, retail sales and manufacturing data came in
weaker than expected. The FOMC hinted that it could
begin hiking interest rates as early as June of this year,
data permitting.

15.87%, as measured by the Shanghai Composite. The
Nikkei was up 10.06%, Hang Seng was up 5.49%, and
Kospi was up 6.55%.3 Chinese equities benefited
from accommodative policies from the People’s Bank
of China (PBoC) while Japanese equities were
supported by Japanese pension fund demand.
EM sold off in the month of March with the MSCI
Emerging Markets Index
down 1.59%, while
managing a +1.91% return in the fourth quarter.
Russian equities declined in March with the MSCI
Russia Index down 2.67% but posted a +18.61%
return during the quarter. Brazilian equities, as
measured by the Bovespa declined 0.84% in March
but increased 2.29% for the quarter as the country
suffers from lower commodity prices, high inflation,
and twin budget and current account deficits.

In Europe, regional equities rallied in March with the
DAX up 4.95%, CAC up 1.66%, FTSEMIB up 3.67%, and
IBEX up 3.07%. UK equities underperformed with the
FTSE down 2.33%. For the quarter, European equities
moved significantly higher with DAX up 22.03%, CAC
up 17.81%, and FTSE up 3.15%, while in the periphery,
equities rallied with the FTSEMIB up 21.80% and IBEX
up 12.08%.2 The economic data across the Eurozone
was generally better than expected although inflation
continued to run well below the ECB’s target inflation
rate.
Asian equities performed well for the month with the
Nikkei up 2.18%, Shanghai Composite up 13.22%, Hang
Seng up 0.31%, and Kospi up 2.78%. For the quarter,
Asian equities were higher, with Chinese equities up
2. The DAX is the German stock index, representing 30 of the largest and most liquid German Companies that trade on the Frankfurt Exchange. The CAC 40 Index is a
French stock market index, tracking 40 of the largest French stocks on the Paris Bourse. The FTSE MIB is a benchmark stock market index for the Borsa Italiana, the Italian
national stock exchange, which consists of the 40 most-traded stock classes on the exchange. The IBEX is the official index of the Spanish Continuous Market, comprised
of the 35 most liquid stocks traded on that market.
3. The Nikkei is a price-weighted index comprised of Japan’s top 225 blue-chip companies on the Tokyo Stock Exchange. The Hang Seng is a free-float capitalization17
weighted index of a selection of companies from the Stock Exchange of Hong Kong. The Kospi is a market capitalization weighted index of all common stocks traded on
Quarterly Commentary 3/31/15
the Stock market Division on the Korea Stock Exchange.

Disclaimer
Important Information Regarding This Report
Issue selection processes and tools illustrated throughout this presentation are samples and may be modified periodically. Such charts are not the only tools used by the
investment teams, are extremely sophisticated, may not always produce the intended results and are not intended for use by non-professionals.
DoubleLine has no obligation to provide revised assessments in the event of changed circumstances. While we have gathered this information from sources believed to
be reliable, DoubleLine cannot guarantee the accuracy of the information provided. Securities discussed are not recommendations and are presented as examples of
issue selection or portfolio management processes. They have been picked for comparison or illustration purposes only. No security presented within is either offered for
sale or purchase. DoubleLine reserves the right to change its investment perspective and outlook, as well as portfolio construction, without notice as market conditions
dictate or as additional information becomes available. This material may include statements that constitute “forward-looking statements” under the U.S. securities laws.
Forward-looking statements include, among other things, projections, estimates, and information about possible or future results related to a client’s account, or market
or regulatory developments.
Ratings shown for various indices reflect the average for the indices. Such ratings and indices are created independently of DoubleLine and are subject to change without
notice.
Important Information Regarding Risk Factors
Investment strategies may not achieve the desired results due to implementation lag, other timing factors, portfolio management decision-making, economic or market
conditions or other unanticipated factors. The views and forecasts expressed in this material are as of the date indicated, are subject to change without notice, may not
come to pass and do not represent a recommendation or offer of any particular security, strategy, or investment. Past performance (whether of DoubleLine or any index
illustrated in this presentation) is no guarantee of future results. You cannot invest in an index.
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In preparing the client reports (and in managing the portfolios), DoubleLine and its vendors price separate account portfolio securities using various sources, including
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DoubleLine seeks to maximize investment results consistent with our interpretation of client guidelines and investment mandate. While DoubleLine seeks to maximize
returns for our clients consistent with guidelines, DoubleLine cannot guarantee that DoubleLine will outperform a client's specified benchmark. Additionally, the nature
of portfolio diversification implies that certain holdings and sectors in a client's portfolio may be rising in price while others are falling; or, that some issues and sectors
are outperforming while others are underperforming. Such out or underperformance can be the result of many factors, such as but not limited to duration/interest rate
exposure, yield curve exposure, bond sector exposure, or news or rumors specific to a single name.
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© 2015 DoubleLine Capital LP

18
Quarterly Commentary 3/31/15

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