why so much negativity?

Why So Much Negativity?

Joe RamosUS Fixed Income

This presentation and all research and materials enclosed are property of Lazard Asset Management LLC

1 Lazard Asset Management

Negative Yielding Debt - Global Aggregate Index

As of September 30, 2019Source: Bloomberg,

$15 trillion

26%

A We are in uncharted waters with regard to US interest rates.


10 Year Rates – 8/31/2019

As of August 31, 2019Source: Bloomberg, Federal Reserve Bank

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%NBER Recession Tsy 10yr


Unemployment - 7/31/2019

0

6

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3019

25

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%NBER Recession U-3 Unemployment Rate

As of July 31, 2019Source: Bloomberg


GDP - 7/31/2019

As of July 31, 2019Source: Bloomberg, MeasuringWorth

-30

-20

-10

0

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1925 1930 1935 1940 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

Annual Nominal GDP

B Fundamentally, the US remains a sea of calm.


GDP (12/31/1960 – 6/30/2019)

As of June 30, 2019Source: Bloomberg, MeasuringWorth


CPI (12/31/1960 – 7/31/2019)

As of September 30, 2019Source: Bloomberg, Federal Reserve Bank of St. Louis


Forward CPI

As of October 17, 2019Source: Bloomberg


Unemployment Rate

As of September 30, 2019Source: Bloomberg


Financial Conditions

As of October 2019Source: Bloomberg


Earnings S&P 500 Companies



Default Rates

As of December 31, 2018Source: Bloomberg

0%

2%

4%

6%

8%

10%

12%

14%

1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020

JPM Default Rate: 1.8% as of 12/31/18 JPM Forecasted Default Rate: 2.0% as of 12/31/20Moodys Default Rate: 2.3% as of 12/31/18 Moodys Forecasted Default Rate: 3.3% as of 12/31/19

C Away from the US, the potential for a super storm is brewing.


Germany - CPI

As of August 31, 2019Source: Bloomberg


Germany - CPI

As of June 30, 2019Source: Bloomberg

Germany - GDP


Germany – Manufacturing PMI and Rates

As of August 31, 2019Source: Bloomberg

German Manufacturing PMI

D The world is buying insurance in the form of long dated US Fixed Income securities.


Negative 10yr Rates

As of October 17, 2019Source: Bloomberg


US 10yr Treasury Term Premium


EThe buying of insurance is generating a false signal of Fed inadequacy. By succumbing to the signal the Fed has shown the market its resolve to maintain US economic conditions but may have increased the severity of the global event it is trying to prevent.


US Yield Curve



Annual Nominal GDP

As of July 31, 2019Source: Bloomberg


Fed Funds Rate


F US business confidence and spending plans are now the key indicators of interest rate policy and the economy.


CEO Confidence



NFIB Small Business Optimism Index



NFIB Small Business CapEx Spending Plans


G Given the potential tail risk, fixed income investments need to focus on the preservation of capital and a reliable exit strategy.

30 Lazard Asset Management30 Lazard Asset Management

US Fixed Income – Risk Mitigation

Avoid Investment Fragility – Security Selection is Key

Select securities based on sound balance sheet lending:

• Credit quality – ability and willingness to get paid back

• Structure – standardized legal contracts that protect lender

• Market sponsorship – long-only institutional demand is key

Concentrate in high conviction investments, diversification does not protect

Willingness to step away from benchmark exposures to protect capital, US domicile investments only

H Biography


Biography

Joe RamosManaging Director, Head of US Fixed IncomeLazard Asset Management LLC (New York)

Joe Ramos is a Managing Director and Head of US Fixed Income. He is also Portfolio Manager/Analyst on the US Fixed Income team. Prior to rejoining the Lazard in 2006, Joe was the Chief Investment Officer of Ambac Financial Group, Inc., where he was responsible for the oversight and management of Ambac’s various investment strategies including the Excess Liquidity, US and Non-Dollar Core Capital, and levered LIBOR+ LDI portfolios. Prior to joining Ambac at the end of 1999, Joe was a senior member at E.H. Capital Group, LLC, where he co-managed an alpha strategy that derived its return from a variety of U.S. and international high yield sources including a material portion from subordinated structured products securities backed by consumer and corporate sector assets.

Joe was one of the original pioneers of the development of the concept of unconstrained behavioral security selection in fixed income markets in the early 1990s based on his direct investment experience managing strategies across the universe of globalfixed income instruments. Tactical investment rotation and disciplined security selection have been the hallmarks of his investment philosophy and style throughout his entire career.

Joe has been actively involved in the structured products and fixed income solutions market since its inception in the early 1980s. He began his career in 1978 as a Fixed Income Analyst for Lehman Brothers, where he developed proprietary software tools for analyzing mortgage-backed securities and beta-based portfolio risk. In 1982, he joined Lehman’s asset manager to create and manage their structured products investment platform. While at Lehman Management Co., he was responsible for the management of a variety of strategies invested in the MBS, ABS, and corporate sectors. These included investment mandates forfinancial institutions, CMO issuer arbitrage, Enhanced Core, and LDI clients. He originally joined Lazard in 1989 to manage Lazard’s LDI and Structured Product strategies. Prior to leaving Lazard in 1995 to form E.H. Capital Group, Joe was the Senior Portfolio Manager responsible for Lazard’s Global Institutional Fixed Income investment platform and directly managed Lazard’s US and Global Core, Plus, LDI, and Structured Alpha strategies.

Joe Ramos has a BS from New York University. He is a member of the CFA Institute, the NYSSA, and the Economic Club of New York.


Important InformationAn investment cannot be made directly in an index. Indices are unmanaged and have no fees.

The performance quoted represents past performance. Past performance is not a reliable indicator of future results.

An investment in bonds carries risk. If interest rates rise, bond prices usually decline. The longer a bond’s maturity, the greater the impact a change in interest rates can have on its price. If you do not hold a bond until maturity, you may experience a gain or loss when you sell. Bonds also carry the risk of default, which is the risk that the issuer is unable to make further income and principal payments. Other risks, including inflation risk, call risk, and pre-payment risk, also apply. High yield securities (also referred to as “junk bonds”) inherently have a higher degree of market risk, default risk, and credit risk. Securities in certain non-domestic countries may be less liquid, more volatile, and less subject to governmental supervision than in one’s home market. The values of these securities may be affected by changes in currency rates, application of a country’s specific tax laws, changes in government administration, and economic and monetary policy.

why so much negativity?

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