December 31, 2014


While the first half of the year saw low volatility and tighter corresponding corporate spreads, the second half had a markedly different feel, with spreads widening across sectors alongside a rally in US Treasuries. While the US fundamental picture in terms of GDP, employment, and corporate profitability strengthened throughout the year, many technicals caused credit to underperform despite a good year in US equities, with the S&P500 up 13.7% for the year. Many negative technicals crept into the market in the second half of 2014, most notably fear regarding the Fed's exit from their multi-year quantitative easing (QE) program that saw massive balance sheet expansion of the Fed to over $4.5 trillion as we write this. To put that number in perspective, the Fed's total assets were less than $1 trillion as recently as August of 2008. In addition, many investors in fixed income as an asset class are worried about the consequences of the Fed increasing overnight interest rates after multiple years of zero-interest rate policy.