Advisory Blog

Timely insights on the issues that matter most to investors – Income, Volatility and Taxes.

The views expressed in these posts are those of the authors and are current only through the date stated. These views are subject to change at any time based upon market or other conditions, and Eaton Vance disclaims any responsibility to update such views. These views may not be relied upon as investment advice and, because investment decisions for Eaton Vance are based on many factors, may not be relied upon as an indication of trading intent on behalf of any Eaton Vance fund. The discussion herein is general in nature and is provided for informational purposes only. There is no guarantee as to its accuracy or completeness.

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April 29, 2016 | 10:15 AM

Where value persists, despite credit and interest-rate risk

Today’s environment poses a unique set of credit and interest-rate risks for fixed-income investors. Profits for S&P 500 companies are expected to fall 9% for the fourth quarter, which would be the fourth consecutive quarterly earnings decline and the first such streak since the financial crisis. Tepid economic growth remains a burden on companies. At the same time, we believe the Fed is still likely to raise its target fed funds rate this year, as it is very close to achieving (and perhaps exceeding) both its unemployment and inflation targets. Though not as urgent as previously thought, fixed-income investors remain vulnerable to rising short-term interest rates.

In this vein, we believe the case for high-yield bonds, floating-rate loans and municipal bonds remains intact, should short-term rates rise.

As shown in the chart below, the dotted square box shows the last period (2004-2007) in which the Fed hiked its target fed funds rate. All three sectors had positive total returns during that period, so it would appear that a likely scenario of modest hikes would pose relatively little threat to returns in these three sectors.

Credit concerns also remain legitimate, given continuing slow economic growth combined with a reasonable likelihood that the U.S. economy is in the latter innings of the current credit cycle. Despite this, however, in our view current valuations and income offered by below-investment-grade debt more than compensate for the credit risks assumed.

Spreads on both high-yield bonds and floating-rate loans are wider than their medians over the past 10 years. Of course, spreads could always widen further, but today’s levels represent a “value cushion” that is rare – slow growth and high expected default rates are already reflected in today’s prices.

Bottom line: With the interest-rate and credit risks of today’s environment, we believe the case for high-yield bonds, floating-rate loans and municipal bonds remains intact, should short-term rates rise. Active management is particularly important and relevant, given deep credit stress in particular sectors, including energy and commodities issuers.

Payson F. Swaffield, CFA

Chief Income Investment Officer

Eaton Vance

We believe the case for high-yield bonds, floating-rate loans and municipal bonds remains intact, should short-term rates rise.

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April 29, 2016 | 12:15 PM

What will get markets to move again?

It appears we may be nearing the limits of what monetary policy can do to get markets moving, as both the Federal Reserve and Bank of Japan (BOJ) offered statements that failed to create a spark. So what will force markets to make the next move?

First, let’s take the Fed’s unsurprising move this week. The Federal Open Market Committee (FOMC) left rates unchanged Wednesday, as was widely expected. The FOMC’s latest statement did tone down recent dovish rhetoric over global risks, but the Fed still remains on guard. This suggests that the Fed is more willing to let things build up to see what will force the market to move.

On the other hand, the BOJ surprised markets by not easing further to help weaken the yen. But like the Fed, this appears to be the BOJ signaling that it is waiting to see what moves the markets. It is as though central banks are handing the baton off to their respective governments. For investors, this will have significant implications.

First, we need to consider that risk markets have made a stellar comeback after the worst start to the year since the Great Depression. But with both the Fed and BOJ on pause, as well as tighter labor markets in the U.S., we think investors need to start thinking about how higher inflation could be the next catalyst that forces markets to move.

In its statement, the Fed noted that inflation continues to run below its 2% longer-term objective. Compare that to March, when the Fed called out a pickup in inflation. With inflation expectations so low, higher inflation is something the market is not expecting at all. We think this is the time to consider opportunities related to inflation, such as commodity-related assets.

To be sure, our opportunistic investment philosophy is not about a big secular trade, such as commodities or the U.S. dollar, though those certainly play a meaningful and long-term role in our view. Our strategy is about finding undervalued gems when the market is focused on the short term. But just as importantly are the day-to-day opportunities that the market provides us. We expect this environment to continue.

Bottom line: Opportunistic and value investing is about having a different mindset than the prevailing “wisdom” of the day and finding value when it is offered by the marketplace. It is about a willingness to stand out for a bit, particularly when we don’t know what will get markets to move again. Volatility breeds opportunity that a flexible strategy can capitalize on.

Kathleen Gaffney, CFA

Co-Director of Diversified Fixed Income

Eaton Vance

Investors need to start thinking about how higher inflation could be the next catalyst that forces markets to move.

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April 28, 2016 | 12:00 PM

The Fed is a lagging indicator

We spend considerable time determining whether indicators are leading, lagging, or coincident. However, as investors, we don’t really care whether indicators lead or lag the economy. Rather, we care whether they lead or lag the financial markets.

With that in mind, investors may be paying too much attention to the Fed. Of course, the Fed is hugely important for the economy and the markets, but it is critical to remember that the Fed is actually a lagging indicator. We expect that to be the case throughout this cycle as well.

Since the Fed began to target the Fed Funds rate in the early-1980s, the Fed has never led the markets either when raising rates or lowering rates. There have been a couple of instances when one could argue that the Fed’s moves were coincident with the markets’, but the Fed typically lags the markets. Sometimes, the lag is as long as a year or more.

The Fed’s recent guidance seems to be following the historical norm. The uncertainty surrounding the U.S. and global economies is preventing the Fed from being the leading indicator that some would like them to be. Recent comments indicate that the Fed may prefer lagging. If the Fed tightens monetary policy too early or too quickly, then they feel they may put the global economy at risk. However, if they tighten too late or too slowly, they feel they can always react to inflation and increase the pace and magnitude of rate increases.

Bottom line: The current Fed’s perceived risk and return seems similar to those of past Fed regimes. With the exception perhaps of the Volker Fed, the Federal Reserve has historically responded to economic conditions rather than set them. The current Fed’s “data dependency” is really nothing new.

Richard Bernstein

CEO and CIO

Richard Bernstein Advisors, LLC

The Federal Reserve has historically responded to economic conditions rather than set them.

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April 28, 2016 | 4:30 PM

Not your father’s dividend stocks

Not so long ago, investing in high-dividend stocks was a form of value investing. Since the financial crisis, however, the composition of the dividend segment of the equity market has changed. In general, it now contains more risk and less value.

At the individual security level, we believe most investors are best served by not “reaching for yield.” At the portfolio level, however, there are various steps investors can take to potentially augment the natural yield coming from their favorite stocks. They range from the mundane to the more exotic:

  • Consider international stocks: By allocating a portion of their equity exposure to non-U.S. stocks, many investors may see a pickup in yield. For example, the MSCI EAFE Index of developed-market stocks in Europe, Australia and the Far East has a dividend yield of 3.5%, roughly 1.4% more than the S&P 500.
  • “Capture” dividends: Depending on a U.S. investor’s holding period, dividend income can be treated as “qualified”* and taxed at lower rates (currently the same rate as long-term capital gains). The investor can then “roll” the proceeds into another dividend-paying stock to repeat the process. There are transaction costs associated with this strategy, and stock prices often fall by the amount of the dividend payment on the ex-date. But, there is research suggesting this strategy has historically produced market-beating returns.
  • Consider an allocation to high-yield bonds: High-yield bonds are often viewed as the equity market’s close cousin due to their higher potential for risk and reward. In February 2016, yields on these bonds had reached high single-digit levels. If appropriate, equity investors can supplement their yield requirements with a modest allocation to this asset class, while still retaining ownership of their favorite lower-yielding growth stocks.

Bottom line: Dividend investing has changed through the years and, as a result, so too should investors’ approach to it. In our judgment, investors should focus primarily on the sustainability of a company’s dividends, rather than the sheer size of its dividend yield. More specifically, look at the company’s underlying fundamentals to gauge its ability to maintain–and grow–its dividend payments over time. These strategies should be undertaken with the help of a professional advisor who has expertise in these areas.




*Qualified dividend income (QDI) is dividend income to which long-term capital gains tax rates are applied (as opposed to higher regular income tax rates). To qualify, the dividends must be paid by an American company or a qualifying foreign company and must not be listed with the IRS as dividends that do not qualify. In addition, the required dividend holding period must have been met.

Edward J. Perkin, CFA

Chief Equity Investment Officer

Eaton Vance

There are various steps investors can take to potentially augment the natural yield coming from their favorite stocks.

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April 27, 2016 | 5:00 PM

Fed in wait-and-see mode until June

Today, the Federal Open Market Committee (FOMC) stood pat with interest rates as expected, leaving the door open for a possible June rate increase. However, while not as dovish as the Federal Reserve’s statement in March, the Fed certainly does not seem committed to a rate increase in June.

Here are the important points I collected from the FOMC’s statement:

  • Worries over global conditions have been downgraded. Today’s statement has less of a focus on global economic and financial developments compared to the Fed’s March statement. That said, the statement did say that the Fed would closely monitor global developments.
  • The Fed did point out the strength of the job market, noting that conditions have improved further even as growth in economic activity “appears to have slowed.” To me, that suggests the Fed is willing to look past negative GDP data for the quarter somewhat and instead focus on the strong labor market.
  • The Fed clearly wants more inflation. In March, the Fed’s statement noted a pickup in inflation; in today’s statement, the FOMC noted that inflation continues to run below its 2% longer-term objective.

Overall, there was not much that is very exciting in today’s FOMC statement. It’s very much along the lines of what I was expecting.

Bottom line: The Fed is now in wait-and-see mode until June. While today’s statement could be viewed as more hawkish than the one delivered last month, the Fed does not appear committed yet to a June rate hike.

Eric Stein, CFA

Co-Director of Global Income

Eaton Vance

The Fed certainly does not seem committed to a rate increase in June.

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April 26, 2016 | 10:00 AM

A secret G20 currency agreement?

Over the past few months, market participants have widely discussed the possibility of an accord at the February G20 meeting in Shanghai to keep the U.S. dollar from appreciating too quickly. If true, what would be the impact on financial markets and the world economy from this type of coordination?

The thinking goes like this: A strong U.S. dollar is negative for emerging-market countries with a large amount of dollar-denominated debt. If the U.S. dollar were to rise significantly in value, we might see a repeat of China’s actions last August, which would prove to be negative for risk markets and the world economy. Therefore, the Fed should be cautious in raising rates so as to not push the U.S. dollar significantly higher, and other major central banks would focus their additional monetary stimulus on domestically oriented policies and be less focused on weakening their currencies so as to not exacerbate any potential so-called currency wars.

The belief of an informal agreement at the G20 meeting is supported by the newfound dovishness from the Federal Reserve. In particular, Fed Chair Yellen’s significantly more dovish tone during a March speech at the Economic Club of New York lends credence to the idea that an informal deal was struck. Since the February Fed meeting, the U.S. dollar has weakened somewhat, giving credence to the view that U.S. dollar weakness is primarily Fed-driven.

Unlike the Plaza Accord in 1985, when a formal deal was established between the five governments to intervene and depreciate the U.S. dollar (or the Louvre Accord in 1987 to stop the dollar’s decline), there was no official deal or announcement in February, so investors are left to speculate on any agreement. Personally, I do believe that there was some at least informal understanding reached at the G20 meeting.

While this agreement would be positive for EM countries who had seen significant currency depreciations over the past few years and China which has been able to weaken its currency vs. a basket of other currencies (but not the U.S. dollar), other developed markets are likely not happy. In the eurozone and Japan, as well as Australia and New Zealand, countries are working to weaken their currencies in an orderly fashion using monetary policy, so they do not want to see their currencies strengthen relative to the U.S. dollar. So it is unlikely that this equilibrium will last over the long term, particularly if Europe and Japan continue to fall short of their inflation targets, as no country really wants to see its currency strengthen in a low-inflation world.

Bottom line: The dollar is certainly less attractive under a more dovish Fed. From an investment perspective, Fed dovishness should be supportive of global credit markets as well as emerging-market assets and TIPS. However, should the Fed begin to become more concerned about the inflation outlook, some of these recent market trends could easily revert.

Eric Stein, CFA

Co-Director of Global Income

Eaton Vance

The belief of an informal agreement at the G20 meeting is supported by the newfound dovishness from the Federal Reserve.

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April 26, 2016 | 10:15 AM

How the DOL fiduciary rules impact 401(k) assets

Shortly after the Department of Labor (DOL) issued much-anticipated final IRA fiduciary rules, we noted that we believe the most important change is the final rules’ acknowledgement that differential compensation (including commissions) may be appropriate for the sale of different categories of investment products. There are other major changes in the final rules, including some that impact 401(k) assets.

The final rules make clear that recommendations to roll over 401(k) assets to an IRA are subject to the fiduciary rules. Thus, firms must comply with the best interest contract (BIC) exemption with respect to rollover advice. The rules acknowledge that a decision to move assets out of a 401(k) may be based on factors other than fees, such as a broader range of investment choices or more personalized investment advice.

The advisor must document why the rollover makes sense in the client’s case, perhaps based on factors such as greater investment options or a higher degree of service.

Bottom line: It appears to us that 401(k) rollover disclosure and compliance will become similar to those involved in advising clients now on a 1035 exchange of annuities: the advisor will be required to set out the pros and cons of the change and the reasons why the change is appropriate in the client’s circumstances.

Andrew Friedman

Principal

The Washington Update

The final rules make clear that recommendations to roll over 401(k) assets to an IRA are subject to the fiduciary rules.

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April 25, 2016 | 9:15 AM

“Staying small” with emerging-market debt

The start of 2016 has marked something of a comeback for emerging-market (EM) debt, which has advanced 13.4% for the year to date through April 20, based on the JPMorgan Government Bond Index-Emerging Markets (GBI-EM). This follows a difficult three-year stretch ending on December 31, in which the GBI-EM gave up almost a third of its value, hurt by sluggish global growth, falling commodities prices and a strong U.S. dollar.

While a tail wind for the asset class is beneficial, we believe that investors tempted to increase EM exposure should carefully consider their investment approach. This is especially true given the expansion of the sector and the proliferation of EM indexes over the past two decades. For example, the first popular EM index – the JPMorgan Emerging Market Bond Index (EMBI) – was introduced in 1991 and comprised only government dollar-denominated debt. The GBI-EM followed in 2005 and comprises local currency sovereign debt. Today, the EM index set also includes proxies for corporate debt as well as lower-rated sovereign issuers.

(See our white paper, “Emerging-market debt: Breaking through the benchmarks,” for a fuller discussion.)

The newer indexes are useful in that they represent additional factors that can drive performance – foreign currencies, credit and lower-rated sovereign debt. However, investing in EM by allocating to indexes is essentially a top-down approach that, in our view, entails a number of drawbacks. For example:

  • Managers must focus on macroeconomic “big things,” like U.S. Treasury yields and global monetary policy. Big things clearly affect EM prices, but with the whole world’s scrutiny, it is hard for EM managers to make money from them in a repeatable fashion.
  • Index countries make up a limited universe that omits about two-thirds of the $32 trillion in GDP represented by emerging and developing markets, according to the IMF (see chart).
  • At any given time, index countries are likely to be unattractive investments, based on valuation, creditworthiness or other metrics EM managers use.

We believe a better approach is to focus on the small things, with bottom-up evaluation of all EM countries – not just those in a benchmark. This approach includes country-level macroeconomic and political research, and stand-alone analysis of specific risk factors, like interest rates, currencies, and sovereign and corporate spreads.

Bottom line: Indexes may be helpful as references, but we believe that “staying small” offers the best way to unlock the potential of EM debt.

Michael Cirami, CFA

Co-Director of Global Income

Eaton Vance

We believe that investors tempted to increase EM exposure should carefully consider their investment approach.

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April 25, 2016 | 12:45 PM

What’s next for the BOJ?

The Bank of Japan (BOJ) meets later this week to discuss monetary policy, with many expecting the central bank to ease further. Given that the yen continues to strengthen even as the BOJ has embraced negative interest rates, what can Japan do to weaken its currency?

First, I do think the BOJ will ease in the near future, with this week certainly a possibility. BOJ Governor Haruhiko Kuroda has been aggressive in his recent rhetoric. I think it’s likely the central bank will do something to drive equity prices higher, likely through more equity purchases. By driving equity prices higher, Kuroda may hope to weaken the yen, or at least keep it from strengthening further.

To many investors, this may sound like the BOJ is reaching the limits of its powers, leaving many to wonder what it would take for the BOJ to weaken the yen. I think that there are three ways the yen could weaken from here:

  • Japanese money starts to significantly flow out of Japan into other countries.
  • Equity strength leads to yen weakness. Traditional thinking would have it the other way around, but I think correlation could go this way.
  • U.S. Treasury yields start to rise, which has historically been associated with a weaker yen.

Bottom line: Negative rates seem to have backfired on the BOJ from both a Japanese yen and equity perspective. With a statement on monetary policy due out on Thursday, I do expect the BOJ to try something else to weaken the yen.

Eric Stein, CFA

Co-Director of Global Income

Eaton Vance

Negative rates seem to have backfired on the BOJ from both a Japanese yen and equity perspective.

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April 22, 2016 | 11:30 AM

The Fed won’t end the party

With a two-day policy meeting next week, there has been lots of chatter in markets recently about the future course of the Federal Reserve’s monetary policy. And since the March FOMC meeting, the chatter certainly has gotten significantly more dovish.

That’s particularly true for Fed Chair Janet Yellen, who has been very focused on a number of factors outside the U.S. economy: the international situation, the U.S. dollar and China, probably more so than the U.S. domestic economy. These factors, along with many others, have tilted Yellen toward a more dovish stance of monetary policy.

So, at the end of the upcoming meeting, I expect the Fed to stand pat and to not make any policy changes. In addition, I do expect the central bank to keep the door open for a possible June rate increase, although I do not believe it will commit to it.

The Fed is very focused on financial conditions, which have eased since the March policy meeting. The U.S. dollar has weakened, commodity prices have climbed, credit spreads have tightened and the U.S. equity market is at its highest point of 2016.

Bottom line: If this continues, I could see the Fed raising rates in June, but I don’t think Fed members want to quiet the party in capital markets too much. So, I think they’ll leave the door wide open.

Eric Stein, CFA

Co-Director of Global Income

Eaton Vance

I don’t think Fed members want to quiet the party in capital markets too much.

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April 22, 2016 | 4:30 PM

The importance of Argentina’s massive bond deal

After a 15-year absence, Argentina is once again accessing the debt markets, a very important step for the third-largest economy in Latin America. Despite the economic challenges – as well as Argentina’s troubled history as a borrower – we think the move helps improve the country’s long-term future.

First, here are the details of the largest emerging-market debt offering:

  • Argentina sold $16.5 billion in debt, slightly above original plans to offer $15 billion.
  • The government said it received $69 billion in bids, highlighting strong demand.
  • The 10-year debt portion of the deal sold with a yield of 7.5%, which is still relatively high compared to other emerging-market countries in Latin America.
  • Demand in the secondary market was also robust, as bonds traded higher after the offering and yields dipped.

For Argentina, the debt deal begins to put a creditor holdout issue into the rearview mirror. Argentina has defaulted on its debt eight times, most recently in 2014, which led to a contentious battle with creditors. A majority of proceeds from this week’s debt deal will be paid to these holdout creditors, removing a barrier to economic growth.

Argentina does have several more hurdles to clear as it works to overhaul its economy. The country is running a fiscal deficit, growth is expected to contract and inflation is running close to 30%. For long-term investors, though, reforms are starting to bear fruit.

In December, Mauricio Macri took over as president, immediately helping to lead Argentina’s reform efforts. As such, we believe that Argentina is one of few positive reform stories in emerging markets. This need for differentiation between positive and negative reform stories highlights the importance of country picking.

We believe that investors need to study macroeconomic and political fundamentals of countries around the world in order to find opportunities in developed, emerging and frontier countries. For example, we think there are many opportunities that lie outside of emerging-market benchmark indexes, like the JPMorgan Government Bond Index-Emerging Markets (GBI-EM), which does not include Argentina’s sovereign debt.

Bottom line: Argentina has taken a very important first step in its economic liberalization. To find opportunities like this, we think investors need to rely on country picking and selection by a professional, experienced manager. We believe that a bottom-up focus can lead to total return and diversification opportunities.

    John Baur

    Director of Global Portfolio Analysis

    Eaton Vance

    We think the move helps improve the country’s long-term future.

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    April 21, 2016 | 9:45 AM

    Will muni bonds stay resilient?

    Tax season is one of the weakest times of the year for municipal bond performance, but the asset class has held up remarkably well through Tax Day 2016. Looking ahead, what should investors expect for the remainder of the year?

    Why is March historically one of the worst-performing months of the year for muni bonds? It’s mostly due to seasonal supply and demand patterns. Typically, March is among the highest new-issue calendar months. And on the demand side, investors tend to sell muni bonds in March to fund tax payments due in April. From 2011 through 2015, the Barclays Municipal Bond Index (the Index) had an average total return of -0.19% in the month of March. For comparison, the Index returned 0.32% in March 2016, its ninth consecutive month of positive total returns.

    Indeed, we saw municipal issuance pick up in March, rising to $42 billion from $32 billion in February. Even as investors piled into riskier assets like high-yield bonds and floating-rate loans in late February and March, municipal fund flows remained solidly positive, averaging $1.2 billion of inflows per week.

    Even with this notable performance during a historically difficult month for the asset class, municipals finished the month attractively valued relative to U.S. Treasurys. The 10-year muni-to-Treasury ratio finished at 96% at the end of March, compared to 85% at the beginning of the year. Similarly, the 30-year ratio ended March at 103% compared to 94% on December 31, 2015.

    But, with absolute yields still extremely low, investors may be asking how much further the run in munis can last. As of 3/31/2016, the Barclays Municipal Bond Index had a year-to-date total return of 1.7%. Despite this solid total return year-to-date, we believe the next nine months will be more of a clip-your-coupon environment. Narrowing credit spreads in the muni market are also signaling a need for selectivity.

    This is why we believe active management can add value and help individual investors navigate the fragmented muni bond market. A flexible approach to muni bonds can help search for opportunities such as taxable muni bonds, insured bonds with distressed underlying credits, hospital bonds and municipal floating-rate notes.

    Bottom line: Muni bonds have shown resiliency in the face of seasonal challenges, and even as investors looked to riskier assets near the end of the first quarter. Should volatility in fixed-income markets increase as we expect, an experienced, skilled investment manager can help navigate the muni market.

    Adam Weigold, CFA

    Senior Municipal Portfolio Manager

    Eaton Vance

    This is why we believe active management can add value and help individual investors navigate the fragmented muni bond market.

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    April 20, 2016 | 3:00 PM

    Make Tax Freedom Day arrive earlier

    Tax Freedom Day, the day when the nation as a whole has earned enough money to pay its total tax bill for the year, finally arrives this weekend. Some interesting facts about Tax Freedom Day from TaxFoundation.org:

    • Tax Freedom Day is April 24, 114 days into 2016 (excluding Leap Day), and one day earlier than last year due to “slightly lower federal tax collections as a proportion of the economy,” per the Tax Foundation.
    • Americans will pay $3.3 trillion in federal taxes and another $1.6 trillion in state and local taxes in 2016.
    • In total, Americans will pay $5 trillion (31% of national income) in taxes this year.

    Losing more than 30% of portfolio returns in a single period can be jarring for many investors. Even more surprising is the substantial effects of taxes over longer time periods. The good news is that tax-sensitive investors can take steps throughout the year to help make Tax Freedom Day arrive earlier.

    The first is tax loss harvesting, something I’ve written about in the past and something that many investors and their advisors engage in at the end of each year. We think investors should take the time to look for opportunities to harvest losses in their equity portfolios throughout the year, not just in December. With the sell-off in equities early in 2016, tax-sensitive investors may have missed an opportunity to redeploy cash into either existing high-conviction holdings or new opportunities provided by the market sell-off.

    Investors also often overlook managing dividends for taxes. Dividend-paying stocks can play a significant role in many investors’ portfolios thanks to the favorable tax treatment of dividends. Under the American Tax Relief Act of 2012, qualified dividend income (QDI) is taxed at the lower long-term capital gains rates.

    Bottom line: Tax Freedom Day is a great reminder of the importance of investing tax-efficiently all year. Start planning now to help reduce the tax impact on your investments and push for an earlier personal Tax Freedom Day in 2017 and beyond.




    Eaton Vance does not provide tax or legal advice. Prospective investors should consult with a tax or legal advisor before making any investment decision.

    The success of any investment program depends on portfolio management's successful application of analytical skills and investment judgment. Active management involves subjective decisions.

    Michael Allison, CFA

    Equity Portfolio Manager

    Eaton Vance

    Tax-sensitive investors can take steps throughout the year to help make Tax Freedom Day arrive earlier.

    Latest advisory blog entry

    April 19, 2016 | 12:45 PM

    Why we favor premium muni bonds

    Understanding premiums on municipal bonds can be confusing for many investors. Common misconceptions regarding premiums can prevent investors from making sound investing decisions in the municipal bond market.

    Unfortunately, when it comes to premium municipal bonds, we often hear these fictions repeated:

    • “If I buy a premium bond and it matures at par, I lose that premium. I will lose money, so I should avoid premium bonds.”
    • “My muni bond, which yields 2% and pays a 5% coupon, provides me with income of 5%.”
    • “If I buy a bond at $110 and it matures at par ($100), I get to book a $10 loss.”

    The concept of “lost premium” is a fiction. Municipal issuance comes as a premium to guard against higher taxes, and it’s important for investors to understand how the coupon factors into the equation, as well as why the yield to worst (YTW) is so important to consider.

    Investors tend to prefer premium municipal bonds once they separate fact from fiction. Thankfully, the facts are easy to understand:

    • The size of a bond’s premium has nothing to do with the bond’s value.
    • Yield (not price) is the meaningful metric to help determine the true return.
    • Premiums help defend against punitive tax consequences of the IRS de minimis rule.
    • An investor can preserve a premium paid by taking only yield income.

    For savvy investors, premium bonds can be an appropriate vehicle for building a muni bond portfolio with a defensive structure in today’s low yield environment. All else equal, a premium bond (higher coupon) will likely outperform a par bond in a rising rate environment thanks to a lower duration, or sensitivity to interest rates.

    Bottom line: We believe security selection will be critical to success when investing in a market as vast and increasingly complex as the municipal bond market. We believe relative value analysis is just as important. As always, individual investors may benefit from skilled professional management and credit research.




    Eaton Vance does not provide tax or legal advice. Prospective investors should consult with a tax or legal advisor before making any investment decision.

    An imbalance in supply and demand in the municipal market may result in valuation uncertainties and greater volatility, less liquidity, widening credit spreads and a lack of price transparency in the market. There generally is limited public information about municipal issuers. As interest rates rise, the value of certain income investments is likely to decline. Investments in income securities may be affected by changes in the creditworthiness of the issuer and are subject to the risk of nonpayment of principal and interest. The value of income securities also may decline because of real or perceived concerns about the issuer's ability to make principal and interest payments.

    Chris Harshman, CFA

    Municipal Portfolio Manager

    Eaton Vance

    Investors tend to prefer premium municipal bonds once they separate fact from fiction.

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    April 15, 2016 | 4:00 PM

    Negative rates have overstayed their welcome

    Low rates are a problem. An article today in The Wall Street Journal notes that more than $8 trillion of sovereign debt now trades at negative rates. But negative rates have now overstayed their welcome, and policymakers need to consider the unintended consequences.

    This problem is something the Federal Reserve is already aware of, though it is unclear if other central banks are too. There was a time for emergency measures. While the global economy is not out of the woods, and an adjustment to higher rates would be painful for a few groups, marginally higher rates would likely be a positive at this point. However, this would require central bankers to admit that they are not central planners and there are limits to monetary policy.

    When global central banks began their march to zero, it was well-intentioned. Lower rates spur investment and increased money supply lead to inflationary pressures as the cost of capital is reduced. But something has changed. It’s unclear what precise threshold was crossed, but incentives and risks have shifted. This brought with it unintended consequences that outweigh the benefits of 0% rates.

    The cost of capital is artificially low and distorting the capital markets. Corporations, at least partially at the behest of the short-term nature of many shareholders, began to embrace the low risk-adjusted return by buying back their own shares. So yes, an extended period of emergency monetary policy has benefitted some.

    However, this has come at the expense of savers. Savers have been forced out of bonds and into equities in order to pick up lost return. Now, the volatility in the equity market has an outsized impact on psychology and, perhaps, spending. The impact on savers has been so severe that many are highlighting the ironic and sad increase in “liabilities” associated with low returns; attaining goals is that much harder.

    We think the Fed (and other central banks) would be well-served to increase rates and generate both a more meaningful cost of capital, as well as improve income for savers. Higher rates would likely ease the pressure on consumers, allowing them to spend. This, along with well needed infrastructure spending and fiscal expansion could lead to a greater demand for credit. Higher rates would be supported by fundamentals. A higher rate would also be an affirmation of growth, and would also likely bring a focus back to long term projects and capital expenditure.

    This thinking, along with relative value, is behind our positioning in commodity related credit as well as currencies that will benefit from the combination of supportive policy and private capital inflow, and away from interest rate risk.

    Bottom line: The adjustment to get to higher rates will potentially be painful for some, particularly those expecting a low volatility world to persist. Capital will likely flow toward sectors of the market that offer a cushion against higher rates, and credit with improving fundamentals.

    Kathleen Gaffney, CFA

    Co-Director of Diversified Fixed Income

    Eaton Vance

    Henry Peabody, CFA

    Diversified Fixed Income Portfolio Manager

    Eaton Vance

    Policymakers need to consider the unintended consequences.

    Latest advisory blog entry

    April 14, 2016 | 4:00 PM

    Investing in a rising tax environment

    Tax rates imposed on upper income taxpayers are now the highest they have been in the past 35 years, according to the non-partisan Congressional Budget Office. The combination of a tax increase in legislation to avoid the fiscal cliff and new taxes imposed to fund the Affordable Care Act caused the top tax rates on investment income to jump by 10 percentage points in 2013. Since that time, Congress has continued to whittle away at tax-saving opportunities.

    Whither tax reform? Almost all of the presidential candidates have expressed a desire to pursue tax reform in an effort to simplify the tax code. The two parties, however, remain polarized in their tax reform positions. Given the disparity in the two parties’ positions, we do not view tax reform legislation as feasible before the 2016 election. If split government continues after the election, enacting tax reform even then will continue to be a significant challenge.

    Absent tax reform, the question becomes whether taxes will stay constant or will increase in the coming years. This analysis in turn is driven by the extent to which Washington will need additional revenue. “Mandatory spending” – spending on entitlements such as Social Security, Medicare, and the Affordable Care Act – is slated to increase significantly in the coming years as the country’s baby boomers age.

    Raising tax rates is not the only way to increase taxes. Nor is it necessary to make sweeping changes to popular deductions and exemptions. Instead, tax revenue can be garnered by eliminating the tax-favored treatment of smaller income items. These changes often are denominated as “loophole closers” because they curtail tax treatment that many in Washington believe is inappropriately generous.

    Examples of other loophole closures that have been under discussion include:

    • Tax the sale of “carried interests” as ordinary income.
    • Eliminate pass-through treatment for oil and gas MLPs.
    • Curtail “stretching” of inherited IRAs and 401(k)s.
    • Apply required minimum distribution rules to Roth accounts beginning at age 70-1/2.
    • Limit Roth conversions to pre-tax dollars.
    • Treat all distributions from S corps and partnerships to owner-employees as subject to employment taxes.
    • Curtail sophisticated wealth transfer techniques.

    Bottom line: Although tax rates might not increase further, taxes paid by high income investors are likely to rise as Congress, over time, eliminates favorable tax treatment of more items to pay for additional spending. Because any change in tax treatment is likely to apply only prospectively, investors should make sure to take advantage of the current tax treatment of endangered items while it remains available.




    Andrew H. Friedman is the principal of The Washington Update LLC and a former senior partner in a Washington, D.C. law firm. He and his colleague Jeff Bush speak regularly on legislative and regulatory developments and trends affecting investment, insurance and retirement products. They may be reached at www.TheWashingtonUpdate.com.

    Andrew Friedman

    Principal

    The Washington Update

    We do not view tax reform legislation as feasible before the 2016 election.

    Latest advisory blog entry

    April 13, 2016 | 1:00 PM

    Whiplash in the financial markets

    It was a V-shaped quarter for the U.S. financial markets. The weakness in stock prices and credit spreads that we saw in late 2015 accelerated into the new year. Then in mid-February, a combination of factors shifted perceptions about the value of riskier assets, igniting a rally that lasted through March.

    What should investors expect going forward? We believe the 2% trend in U.S. growth that has been in place since the Great Recession will continue in 2016, even though signs of an aging economic cycle are increasingly apparent. It seems the Fed would agree. The central bank’s recent actions show its reluctance to disrupt the current expansion as it maintains emergency-like policy for the foreseeable future.

    Both the developed and emerging world continue to face an uncertain outlook in China, which has led the synchronized global slowdown and represents the main threat to our 2% U.S. growth outlook. Chinese policymakers have been active in addressing the country’s economic problems, including allowing their currency to weaken. As a result, growth in China appears poised to improve; however, we believe it will fall short of the government’s official projection of 6.5% to 7% for 2016. While it is unusual for a global slowdown to drag the U.S. into recession, we recognize that globalization increases this prospect.

    The current U.S. expansion is long by historical standards and, as one would expect, inflationary pressures are building and corporate profit margins are being squeezed. In our view, the deterioration in earnings, combined with shareholder-friendly tactics like M&A and stock buybacks, also point to a mature credit cycle. Further evidence of this, ratings downgrades have increased substantially. So while the recent pickup in market volatility has increased the opportunity for bond investors to benefit from skilled security selection, we are maintaining a bias toward high-quality issuers.

    We are also keeping a close watch on energy prices due to their influence on inflation and interest rates. Prices appear to have bottomed in the first quarter, and any dramatic moves from here will surely filter through to both. Importantly, although energy is just starting to stabilize, inflation is already returning to its 2% trend, led by core measures.

    Bottom line: The Fed’s reactions to mounting price pressures will reveal its tolerance for inflation at or above its 2% target. Will the Fed remain focused on the employment side of its dual mandate or put greater emphasis on price stability? This is the big question in our minds.

    Thomas Luster, CFA

    Co-Director of Diversified Fixed Income

    Eaton Vance

    The Fed’s reactions to mounting price pressures will reveal its tolerance for inflation at or above its 2% target.

    Latest advisory blog entry

    April 13, 2016 | 11:00 AM

    3 reasons for earnings optimism

    First-quarter earnings season has unofficially begun. The usual pattern of consensus earnings estimate revisions for the S&P 500 is one where each new calendar year brings a sense of optimism with earnings forecast to grow 8%-12%, only to be followed by cuts to numbers as reality disappoints and numbers are lowered. This trend has unfolded each of the past four years, as shown in the chart below.

    Notice that the 2016 earnings estimate was cut throughout the second half of last year and currently stands only 1% above 2015 earnings. With these lowered expectations and certain headwinds turning into tail winds, estimates should now be achievable. There are three reasons for my optimism around earnings:

    1. Strong U.S. dollar headwinds will abate. In 2015, foreign exchange (FX) created a 3%-4% earnings-per-share (EPS) drag for the S&P 500. It was even higher for multinational companies. The trade-weighted dollar was up 14% year over year in Q4 2015, but I think it will likely be flat by midyear 2016.
    2. The drag from lower oil prices will end soon. Oil company earnings have been holding back the aggregate EPS number for the past 18 months. There is still downward pressure on this sector’s earnings, but the size of the drag on year-over-year growth rates is now modest.
    3. Company guidance is more conservative than usual. In the first few weeks of 2016, when many U.S. companies gave earnings guidance, the market was very volatile and the economic backdrop was highly uncertain. It seems likely that many companies used very conservative assumptions when making their public forecasts. For example, we know of one that used a euro-to-U.S.-dollar exchange rate of 1.00 (parity) even though the actual rate was 1.10 at the time, and is 1.14 now.

    Bottom line: Warren Buffett talks about waiting for the fat pitch. When there is a lack of opportunities, patience and inactivity should be the order of the day. After the sharp rally in equity prices (and collapse in volatility) that we have seen since February 11, there are fewer obvious things to do in this market. Perhaps earnings results will prove to be the catalyst that brings a fresh set of opportunities.

    Edward J. Perkin, CFA

    Chief Equity Investment Officer

    Eaton Vance

    Perhaps earnings results will prove to be the catalyst that brings a fresh set of opportunities.

    Latest advisory blog entry

    April 12, 2016 | 3:00 PM

    Examining the final DOL fiduciary rules

    Last week, the Department of Labor (DOL) issued much-anticipated final rules that impose a fiduciary duty on financial advisors to the extent they recommend investments for their clients’ IRA accounts.

    In our view, the most important change is the final rules’ acknowledgement that differential compensation (including commissions) may be appropriate for the sale of different categories of investment products. For example, compensation paid for a mutual fund sale need not equate with compensation paid for the sale of an annuity. The new rules do require, however, that such differing compensation must be based on “neutral factors” such as the time or complexity of the work involved, rather than to promote sales of more lucrative products.

    Thus, a firm might draw a distinction between compensation paid for sales of mutual funds and variable annuities based on the additional time needed to explain the latter investment to the client. That additional time allows the advisor to receive greater commissions in connection with annuity sales (as long as the compensation received is reasonable). The challenge for firms will be demonstrating that the additional annuity sale compensation fairly reflects the additional time spent and that the compensation is reasonable.

    The new rules also provide that advisors may continue to receive compensation on products sold before the regulation becomes effective next April without regard to the new rules. This exception applies to advice to retain a prior investment; to adhere to an earlier established systematic purchase program; and to change investments among choices available under a product such as a variable annuity (provided the advisor does not receive additional compensation for such advice).

    Bottom line: These final rules represent a significant improvement over the proposed rules DOL issued last year, although some fundamental concerns remain to be worked out. We are in the process of preparing a full white paper discussing the new rules.




    Andrew H. Friedman is the principal of The Washington Update LLC and a former senior partner in a Washington, D.C. law firm. He and his colleague Jeff Bush speak regularly on legislative and regulatory developments and trends affecting investment, insurance and retirement products. They may be reached at www.TheWashingtonUpdate.com.

    Andrew Friedman

    Principal

    The Washington Update

    These final rules represent a significant improvement over the proposed rules DOL issued last year.

    Latest advisory blog entry

    April 12, 2016 | 3:00 PM

    The return of capital gains

    The tax drag on equities has historically been a cyclical phenomenon. Evidence suggests that we continue to find ourselves in the throes of a particularly harsh cycle. That’s due to fact that the maximum long-term capital gains rate increased for high-income taxpayers only a few years ago.

    In the U.S., a mutual fund is required annually to distribute substantially all of its net investment income in the form of dividends and net realized capital gains. Distributions are then subject to tax when paid to shareholders and are included in a shareholder’s income tax return. Taxable investors pay taxes on these distributions, regardless of whether they receive or reinvest them.

    Over the past few years, the percentage of mutual funds with capital gains distributions has climbed markedly. According to Morningstar, 66% of all equity mutual funds paid capital gains in 2015, more than doubling since 2011*. To us, this is not a surprise; many stock funds are run with little or no regard for investors’ tax liability. Due to the evolution and growth of tax-deferred accounts, such as 401(k)s and IRAs, many investment managers focus less on managing their equity mutual funds with taxes in mind. These qualified accounts have altered their behaviors to include shortened holding periods, increased trading frequency and, ultimately, more potential capital gains distributions.

    And now, many investors are sitting on significant embedded capital gains. After the downturn of late 2008 and early 2009, investors had little reason to worry about capital gains on Tax Day. Offsetting taxes simply has not been a high priority for investors who have had losses embedded in their portfolios since the financial crisis in 2008.

    More than seven years into the bull market in equities, these losses have largely been exhausted. With the equity market reaching new records, capital gains are piling up for many mutual funds. These distributions can generate unexpected tax bills for investors. As the chart below shows, capital gains distributions from stocks and equity funds likely rose in 2015.

    Bottom line: In this challenging environment, it is critical that investors understand the potential impact of capital gains and taxes on their portfolios. Appropriate strategies to help mitigate the tax drag should be explored. By pursuing a sound, tax-aware investment approach, investors may be able to optimize the likelihood of reaching their long-term goals. Investors should consult their financial and tax advisors for more information.




    * Funds included are only equity funds and are the oldest share class. Average capital gains amount is based off the percentage of capital gains relative to a fund’s share price as of 12/31 of the respective year. Past performance is no guarantee of future results.

    Investment performance is sensitive to stock market volatility. Market conditions may limit the ability to generate tax losses or to generate dividend income taxed at favorable tax rates. A Fund's ability to utilize various tax-managed techniques may be curtailed or eliminated in the future by tax legislation or regulation.

    Michael Allison, CFA

    Equity Portfolio Manager

    Eaton Vance

    These distributions can generate unexpected tax bills for investors.

    Latest advisory blog entry

    April 11, 2016 | 3:00 PM

    Don’t ignore higher taxes until Tax Day

    Here is a sobering fact: Investors in the highest tax bracket gave roughly half of their taxable bond investment income to Uncle Sam in the 2015 tax year. Combining federal and state taxes, many investors may find themselves in tax brackets above 50% when Tax Day arrives on April 18.

    Higher tax rates highlight the increased value of muni bonds’ tax exemption. The combined effect of several tax increases (capital gains, ordinary income, health care and reinstated limitations) since 2013 has burdened many investors, who should not wait to begin thinking about their next tax bill. We think many investors should now consider tax-exempt muni bonds to potentially help offset the pinch of higher taxes going forward.

    Interest income from munis is generally exempt from federal income taxes and, if the bonds are held by an investor residing in the issuer state, they may be exempt from state and local income taxes as well. Given the higher tax environment, we think investing in munis remains valuable within a diversified portfolio, particularly for income-seeking investors in higher tax brackets.

    When comparing munis to other taxable fixed-income alternatives, investors should examine the taxable-equivalent yield to determine whether it represents a good value. As of March 31, munis (as measured by the Barclays Municipal Bond Index) yielded 1.93% on a pretax basis. Under the 2012 maximum tax rate of 35%, that is equivalent to a 2.97% taxable instrument. But under the maximum rate of 44.59%, which includes the Medicare tax and limitations on itemized deductions in effect since 2013, the taxable-equivalent rate jumps to 3.48%.

    Bottom line: For investors concerned about the tax drag on their portfolio, tax-free muni income may hold strong appeal. We think both high-net-worth and less affluent investors should consider munis when pursuing a tax-aware investment approach, in consultation with their financial and tax advisors.




    Past performance is no guarantee of future results.

    Diversification cannot ensure a profit or eliminate the risk of loss.

    An imbalance in supply and demand in the municipal market may result in valuation uncertainties and greater volatility, less liquidity, widening credit spreads and a lack of price transparency in the market. There generally is limited public information about municipal issuers. As interest rates rise, the value of certain income investments is likely to decline. Investments in income securities may be affected by changes in the creditworthiness of the issuer and are subject to the risk of nonpayment of principal and interest. The value of income securities also may decline because of real or perceived concerns about the issuer's ability to make principal and interest payments.

    Cynthia Clemson

    Co-Director of Municipal Investments

    Eaton Vance

    Craig Brandon, CFA

    Co-Director of Municipal Investments

    Eaton Vance

    We think investing in munis remains valuable within a diversified portfolio, particularly for income-seeking investors in higher tax brackets.

    Latest advisory blog entry

    April 8, 2016 | 2:45 PM

    Muni bonds weather the storm

    Municipal bonds notched another positive quarter to start the year, with the Barclays Municipal Bond Index* advancing 1.67% during the first three months of 2016, even as financial market volatility persisted due to ongoing global growth concerns. Muni bonds helped investors weather the storm, and we think the asset class continues to be attractive to investors seeking tax-exempt yield.

    Despite the increased market volatility, as well as concerns about Puerto Rico’s upcoming deadlines, muni bonds continue to perform well, reinforcing the reasons we think investors should consider muni bonds in a diversified portfolio:

    • Muni bonds provide income that is exempt from federal taxes.
    • The credit quality of most muni issuers is stable.
    • Muni bonds may provide diversification to an overall portfolio.
    • Muni valuations are relatively attractive versus other fixed-income asset classes.

    After back-to-back years of relative outperformance, AAA-rated municipal-to-Treasury ratios had dropped to levels that indicate muni bonds are not as cheap as they were to begin 2015. But in a reversal of last year’s trend, munis lagged U.S. Treasurys during the first quarter of 2016. As a result, intermediate- and long-term securities ended the period at comparatively attractive valuations, as the chart from the latest Monthly Market Monitor shows. Historically, when investors have purchased municipal bonds at relatively high ratios, they have experienced outperformance, although past performance is no guarantee of future results.

    Across the curve, yields moved somewhat proportionally lower during the first quarter, although intermediate-term yields declined most significantly. The continued low-rate environment fueled investors’ appetite for higher-yielding securities. On a total return basis, longer-duration bonds outperformed shorter-duration securities, and lower-investment-grade munis outpaced many higher-quality securities.

    As we said in January, we think the muni market is in for a repeat year of investors “clipping their coupons.” For those investors who believe global growth challenges will keep a lid on long rates, the muni bond market offers longer duration than other sectors, such as the corporate bond market. In particular, the higher income potential from high-yield muni bonds may be most attractive despite the additional credit risk. That said, we believe that high-yield munis should be a piece of a muni bond exposure, not an entire allocation.

    Bottom line: With volatility in the bond markets expected to continue, we think investors should consider muni bonds as part of their overall asset allocation. However, credit research remains very important. We believe skilled professional management and credit research are absolutely necessary to navigate the muni market.




    *The Barclays Municipal Bond Index is an unmanaged index of municipal bonds traded in the U.S.

    Past performance is no guarantee of future results.

    Diversification cannot ensure a profit or eliminate the risk of loss.

    An imbalance in supply and demand in the income market may result in valuation uncertainties and greater volatility, less liquidity, widening credit spreads and a lack of price transparency in the market. As interest rates rise, the value of certain income investments is likely to decline. Investments in income securities may be affected by changes in the creditworthiness of the issuer and are subject to the risk of nonpayment of principal and interest. The success of any investment program depends on portfolio management's successful application of analytical skills and investment judgment. Active management involves subjective decisions.

    Cynthia Clemson

    Co-Director of Municipal Investments

    Eaton Vance

    Craig Brandon, CFA

    Co-Director of Municipal Investments

    Eaton Vance

    We think investors should consider muni bonds as part of their overall asset allocation.

    Latest advisory blog entry

    April 8, 2016 | 4:30 PM

    Why mean reversion could mean higher loan returns

    The first quarter of 2016 closed with a six-week floating-rate loan rally that pushed prices up more than two points from February lows to 91.5, based on the S&P/LSTA Leveraged Loan Index*. The rally followed a sharp sell-off at the start of the year that hit bottom in mid-February, so at quarter-end the price on the Index was just 25 basis points (bps) higher than December 31, and spreads** just 55bps tighter. In our view, at today’s prices, floating-rate loans still offer substantial value.

    The spread of 658bps over Libor on March 31 is 118bps greater than the average level since Index inception in 1999, which suggests that reversion to the mean could boost total returns in coming years.

    To test this, we examined how investors have fared, on average, between one and five years after dates when loan spreads have been approximately at today’s level. Our analysis looked for end-of-month spreads that were within 30bps, plus or minus, of 658 (30bps is less than 0.1 standard deviations for spread levels since 1999).

    We found 14 instances that met this requirement, and all the averages for subsequent returns (illustrated in the chart below) exceed the 5.1% annual average total return that loans have provided since 1999.

    On average, total returns for subsequent one-year periods were 6.3%. After two years, the annualized average return (on average) was 6.7% and after three years, 6.3%. Returns in the fourth and fifth years fall closer to the long-term average, as might be expected – most of the market value gains were captured in the prior years. The results underscore the fact that total return from loans has historically been mostly from income – periods with large discounts or premiums to par have been the exception, not the rule.

    Bottom line: We believe the track record of floating-rate loans supports the view that reversion to the mean is likely to increase total return in the coming years, and that loans today offer good value.




    *The S&P/LSTA U.S. Leveraged Loan Index is designed to reflect the performance of the largest facilities in the leveraged loan market.

    **Spread is the difference between the yield of a security and a comparable duration U.S. Treasury.

    Past performance is no guarantee of future results.

    An imbalance in supply and demand in the income market may result in valuation uncertainties and greater volatility, less liquidity, widening credit spreads and a lack of price transparency in the market. Bank loans are subject to prepayment risk. Purchases and sales of bank loans in the secondary market generally are subject to contractual restrictions and may be subject to extended settlement periods.

    Scott Page, CFA

    Co-Director of Bank Loans

    Eaton Vance

    Craig Russ

    Co-Director of Bank Loans

    Eaton Vance

    In our view, at today’s prices, floating-rate loans still offer substantial value.

    Latest advisory blog entry

    April 7, 2016 | 3:30 PM

    Why high yield may still offer value

    March was the second month in a row in which high yield exhibited strong performance. The record inflows began in February and continued into March, helping to fuel another strong showing for the asset class. But in the final days of the month, inflows dissipated and it appeared this rally might be coming to an end. Where does that leave the high-yield market today?

    Notably, as the rally wore on, CCC-rated credits caught a bid and dramatically outperformed the broader market, returning 10.22% for the month. This was a phenomenon we have not seen in the last few rallies. For example, in October 2015, CCC-rated bonds continued to underperform in the high-yield rally, as the bid for risk was not deep enough. This time was different.

    Looking ahead, we think it is important for investors to consider the following:

    • The high-yield asset class is trading with an average spread* over 130 basis points (bps) wide of the long-term historic average.
    • The average price is trading at a 10% discount to par.
    • U.S economic numbers continue to show strength, including Friday’s jobs data.
    • Generally speaking, investors do not appear to be concerned about rising rates.
    • We think we have seen the lows in oil prices.

    For high yield, that last point is important. In March, the energy and metals and mining sectors led the asset class in performance. The energy sector posted a total return of over 16% for the month. The weaker dollar also helped the rebound in the metals/mining sector.

    Bottom line: At the end of March, high yield traded about 15bps wide of where it began the year in terms of spread. We believed that high yield was attractive at the beginning of the year, so given the recent round-trip, we remain convinced investors should consider opportunities now in the asset class.




    *Spread is the difference between the yield of a security and a comparable duration U.S. Treasury.

    Past performance is no guarantee of future results.

    An imbalance in supply and demand in the income market may result in valuation uncertainties and greater volatility, less liquidity, widening credit spreads and a lack of price transparency in the market. Investments rated below investment grade (typically referred to as "junk") are generally subject to greater price volatility and illiquidity than higher-rated investments.

    Kelley Baccei

    High Yield Portfolio Manager

    Eaton Vance

    This was a phenomenon we have not seen in the last few rallies.

    Latest advisory blog entry

    April 6, 2016 | 2:00 PM

    Can the rally in cyclicals last?

    Equity markets have seen a nice rebound from the sharp early-year decline we experienced in January and into February, and a rotation out of growth stocks and into value has taken place. The recent outperformance of once-unloved and underowned deeper cyclical areas such as industrials and commodities is not surprising given a recent uptick in several macro data points, suggesting the potential for a better economic environment going forward. Also, the Federal Reserve has recently adopted more dovish rhetoric, taking some steam out of the U.S. dollar strength, which is generally positive for commodities, particularly oil.

    So where do we go from here? Is this a short-term trade or something more sustainable? The answer may depend on your macro perspective. If you believe the global economy is getting better, cyclical stock outperformance is likely to continue. If you expect global economies to remain sluggish and the U.S. economy to continue at its current slow-growth pace, growth stocks are likely to re-emerge as leaders; investors tend to put a premium on growth in a slow-growth world. And less likely, but not out of the realm of possibility, a sharp and sudden slowdown in the U.S. economy could mean problems for U.S. equities across the board. Like Janet Yellen and the Federal Reserve, investors everywhere need to be vigilant and remain data-dependent.

    Macro issues notwithstanding, first-quarter earnings season is now approaching and should give us some clues as to how the rest of the year is likely to play out. Many of these companies are on the front lines of the global economy and we will be listening intently to each company’s commentary and outlook in order to best position our portfolios for the remainder of the year.

    Most stocks have had a nice run since the middle of the first quarter and from these levels, investors will have to work harder to find positive reward-to-risk opportunities. Volatility will likely persist through earnings season, but opportunities may arise if investors are both opportunistic and patient. There will be disappointments – there always are. But, by and large, we think the companies that we own should see strong earnings gains and their stocks, at least eventually, should follow.

    Given so much global uncertainty, periodic bouts of volatility should be expected to continue. Our strategy is twofold:

    • Stick with quality, well-managed companies that can continue to grow both revenues and earnings despite the uncertain macro environment.
    • Use these periodic bouts of volatility to our advantage by buying our favorite investments at attractive prices.

    Bottom line: The skilled investor should welcome volatility, not fear it. And it’s times like these when skilled stock pickers can add long-term value to investor portfolios.




    The success of any investment program depends on portfolio management's successful application of analytical skills and investment judgment. Active management involves subjective decisions.

    Lewis R. Piantedosi

    Portfolio Manager, Growth Team

    Eaton Vance

    If you believe the global economy is getting better, cyclical stock outperformance is likely to continue.

    Latest advisory blog entry

    April 6, 2016 | 4:30 PM

    End of the line for Puerto Rico?

    Puerto Rico’s fiscal situation has reached a breaking point, with several major debt service payments looming, no access to credit markets and no imminent help coming from the U.S. government. Now, a move by lawmakers has sent the island’s fiscal future into complete disarray.

    Earlier this week, the Puerto Rico House and Senate passed the Puerto Rico Emergency Moratorium and Financial Rehabilitation Act, which states that neither Puerto Rico nor its Government Development Bank (GDB) “may have sufficient resources to make their respective payments without potentially jeopardizing the Commonwealth’s ability to provide essential services.”

    The Act has three primary objectives:

    • It authorizes the governor to declare a moratorium on debt service payments through January 30, 2017, for the Commonwealth, GDB and government instrumentalities of Puerto Rico.
    • It provides for a stay on creditor remedies, so that creditors cannot sue the Commonwealth.
    • It allows for the restructuring of the GDB (into a good bank/bad bank structure).

    The bill quickly passed through the Puerto Rico legislature because the GDB must make a $423 million debt service payment on May 1, followed by $1.9 billion in debt service payments due on July 1 from 14 different Puerto Rico issuers – including $780 million in general obligation (GO) payments. We note that to date, Puerto Rico has not paid debt service on four different debt issues.

    The Act comes after a plan outlined last week by the House Committee on Natural Resources failed to gain bipartisan support. The House plan called for a federal oversight committee, court-supervised debt restructuring where necessary and infrastructure revitalization. As there is doubt the federal government will reach a compromise by May 1, it does not appear that Puerto Rico will have a framework to handle the wave of expected defaults. We liken it to playing a game without a referee.

    Puerto Rico made it clear in February 2016 that a debt moratorium was a possibility. Still, the market reaction to the move has been negative, as evidenced by the fact that Puerto Rico’s most liquid bond (the 8% GO bonds issued in 2014) traded down approximately five points on the news to $65 – the lowest level since the bonds were issued in March 2014.

    Bottom line: The crisis in Puerto Rico has escalated dramatically due to the passage of the debt moratorium bill. If the moratorium is declared, defaults are set to accelerate. While it is unclear exactly how the broader municipal market will react if Puerto Rico defaults on its GO or sales tax (COFINA) bonds, we continue to believe that municipal credit quality in the broader municipal market remains stable. Therefore, we would view any disruption to the broader muni market caused by Puerto Rico as a potential buying opportunity.




    An imbalance in supply and demand in the income market may result in valuation uncertainties and greater volatility, less liquidity, widening credit spreads and a lack of price transparency in the market. As interest rates rise, the value of certain income investments is likely to decline. Investments in income securities may be affected by changes in the creditworthiness of the issuer and are subject to the risk of nonpayment of principal and interest.

    William Delahunty, CFA

    Director of Municipal Research

    Eaton Vance

    The crisis in Puerto Rico has escalated dramatically due to the passage of the debt moratorium bill.

    Latest advisory blog entry

    April 5, 2016 | 1:45 PM

    Why ESG investing is gaining traction with investors

    Socially responsible investing (SRI) has come a long way in the past few decades. Initially, SRIs were largely used as a means to avoid controversial sectors, such as weapons, alcohol, tobacco, animal testing, abortion, coal or oil. SRI investing earned a stigma – deserved or not – of delivering suboptimal investment returns due to complete avoidance of some industries.

    About a decade ago, if an investor expressed a concern about climate change, the course of action was often negative screening of carbon-intensive investments like coal and oil companies. The result was a fund that was typically less diversified than its non-SRI counterpart, and these funds tended to underperform the broader market.

    There has been a shift in the posture of SRI investment strategies recently. Rather than using SRIs as a means to avoid sectors, investors are now more commonly using them to support companies that align with their beliefs. Once a primarily exclusionary method of investing, these inclusionary portfolios are generally referred to as environmental, social and governance (ESG) investments. Today, the most popular ESG investments are “green” funds, which prioritize companies that are environmentally friendly relative to their peers. Another common ESG focus is on companies that promote gender equality.

    The desire to impact positive social change has resulted in investment inflows to the ESG category. According to a poll conducted last year by Morgan Stanley, over 70% of all investors surveyed said they were interested in sustainable investing. In the increasingly important millennial category, that proportion was 84%.

    With the rise of ESG investments, investors may be able to gain more diversification than SRI funds enjoyed historically. Companies that focus on sustainability and impact management have historically shown the ability to create a stronger long-term enterprise. Thus, the distinction between traditional SRI and ESG investments is very important.

    We think that investors should consider a selection of companies demonstrating a commitment to sustainability and impact practices. Fortunately, companies are more frequently reporting SRI data which is increasing in quality as well as quantity. Just 20% of S&P 500 companies issued corporate social responsibility reports in 2011. By 2014, 80% of S&P 500 companies were issuing these reports (Source: Governance & Accountability Institute).

    We do note that positive screening is not insusceptible to underperformance. Even if the investor had decided to back a budding clean tech company, the clean tech industry has since gone through significant corrections over the past few years. We think that diversification is still an important consideration.

    Bottom line: With the increased popularity of ESGs, we believe that SRI fund performance today is not deserving of this stigma. Investors may benefit from a professional manager who can select companies creating a stronger long-term enterprise through ESG practices.




    Investing entails risk. An ESG investing strategy may underperform relative to the broader market. The success of any investment program depends on portfolio management's successful application of analytical skills and investment judgment. Active management involves subjective decisions.

    Michael Allison, CFA

    Equity Portfolio Manager

    Eaton Vance

    The desire to impact positive social change has resulted in investment inflows to the ESG category.

    Latest advisory blog entry

    April 4, 2016 | 3:45 PM

    Jobs data lands straight down the fairway

    With the Masters kicking off this week, perhaps a golf reference is in order. The U.S. labor market continues to look like vintage Tiger Woods, not getting rattled with all that is going on around, driving straight down the center of the fairway.

    While Tiger Woods’ best days may be behind him, the U.S. labor market continues to show there is more left in the job growth tank. The U.S. economy added 215,000 jobs in March, coming in above expectations once again. While these job gains were notable, the other components of the report were equally impressive:

    • The elusive wage inflation did perk up in March, increasing 0.3% month over month, above expectations.
    • The participation rate ticked higher for the fourth consecutive month to 63%, a two-year high.
    • As more fringe workers re-entered the labor force (396,000) and searched for jobs, the unemployment rate inched higher to 5.0% from 4.9%. It took years to play out, but economists expected that as the economy and labor market improved, the unemployment rate would bump higher. If this trend persists, it would indicate additional slack in the labor market, dampening wage inflation and buying the Fed a little more time.
    • We continue to see impressive job gains in health care, construction, and bars and restaurants.
    • Local governments continued their hiring spree, adding 19,000. Rising home prices should continue to feed their coffers over the coming months.
    • The only real negative in the report was the 29,000 jobs lost in the manufacturing sector, which was the biggest loss since 2009. While manufacturing is clearly still hurting from the commodities plunge and the U.S. dollar rally from mid-2014 to early 2015, the service sector remains very strong.

    A few weeks ago, this solid report would have likely caused a fairly large sell-off in Treasury bond prices. But after the dovish remarks from Yellen last week, it seems the Fed is not as data-dependent as it was a few months ago; the markets believe the so-called ”Yellen Put” is back in play for risk assets.

    Yellen and the other dovish members of the Federal Open Market Committee (FOMC) will be impressed by this labor report; however, they have raised the bar on the data needed for future rate hikes. Historically, hawkish FOMC members would squawk louder after another strong labor report. With the retirement of Richard Fisher and Charles Plosser last year, the hawks are slowly becoming an endangered species.

    Bottom line: Due to Yellen’s recent dovish speech, an April rate hike is off the table despite a strengthening labor market and rising inflation expectations. For June to be in play we will need the economic data to come in above expectations. Over the coming weeks pay attention to Fed speeches to see if there is any change in tune.

    Andrew Szczurowski, CFA

    Portfolio Manager, Global Income Group

    Eaton Vance

    An April rate hike is off the table despite a strengthening labor market and rising inflation expectations.

    Latest advisory blog entry

    April 1, 2016 | 3:00 PM

    Are Chicago bonds a buying opportunity?

    THIRD IN A SERIES

    Last week, the Supreme Court of Illinois rejected Chicago’s pension reforms related to two of the city’s four pension plans. In our last blog post, we mentioned that this was a likely outcome, because last May the Supreme Court of Illinois struck down the state’s 2013 pension reforms by stating that pension benefits had constitutional protections and could not be “diminished or impaired.”

    While the ruling was not surprising, Chicago now must come up with a new strategy to address the funding needs of these two pension plans in light of the Supreme Court ruling.

    The Supreme Court pension ruling generated numerous negative headlines, and led Fitch to downgrade Chicago to BBB- from BBB+. While Moody’s and S&P have maintained their ratings to date, they did warn that if Chicago did not formulate a clear plan to fund the Municipal and Laborer pension plan liabilities, it would be a credit negative. From an investment perspective, though, we put aside the negative headlines and evaluate the credit quality and relative value of Chicago’s general obligation (GO) debt.

    Based on where Chicago’s GO bonds have traded over the past year, we think that these bonds have offered several relative value opportunities for some value-seeking municipal bond investors. The chart below shows historical spreads of Chicago’s GO debt versus other BBB-rated municipal bond debt.

    Prior to the Moody’s downgrade of Chicago to junk status in May 2015, Chicago’s GO bonds were trading at relatively tight spreads of 134 basis points (bps) to the AAA muni average (Sources: Thomson Reuters and S&P). Since then, Chicago has passed $643 million in property tax and fee increases; this is a substantial 18% increase to Chicago’s annual revenues, based on the unaudited 2015 budget. These additional taxes should go a long way in helping Chicago meet its legacy pension obligations. However, Chicago’s GO debt is trading at spreads of 254 bps; this is more than 165 bps wider than other BBB-rated GO bonds.

    Bottom line: There is elevated headline risk and volatile price swings in the name but also opportunity. Chicago’s GO debt is rated investment grade by two of the three rating agencies as of today, yet trades at higher yields than the below investment-grade index. We think that opportunistic investors who rely on professional expertise, due diligence and active management, may be able to take advantage of these wide spreads on Chicago debt.




    The success of any investment program depends on portfolio management's successful application of analytical skills and investment judgment. Active management involves subjective decisions.

    An imbalance in supply and demand in the income market may result in valuation uncertainties and greater volatility, less liquidity, widening credit spreads and a lack of price transparency in the market. As interest rates rise, the value of certain income investments is likely to decline. Investments in income securities may be affected by changes in the creditworthiness of the issuer and are subject to the risk of nonpayment of principal and interest.

    William Delahunty, CFA

    Director of Municipal Research

    Eaton Vance

    We put aside the negative headlines and evaluate the credit quality and relative value of Chicago’s general obligation debt.

    Latest advisory blog entry

    March 31, 2016 | 10:15 AM

    Wide range of value in floating-rate loans

    When we talk about value opportunities in the floating-rate loan market, we typically refer to the price of the S&P/LSTA Leveraged Loan Index as a market proxy that offers a useful “50,000-foot” perspective. But, taking a closer look at pricing across the loan market can help illustrate the great range of value that we see.

    Starting with the high-level view, the March 18 Index price of 91.25 means the market is expecting credit losses of 8.75% over the lives of the loans, which, on average, has been three years. When you factor in the 80% default recovery rate that lenders have historically achieved, that translates to a prediction that 44% of the $800 billion loan market will go bankrupt over three years. This scenario seems very implausible to us, and the range of value opportunities becomes more apparent with additional market pricing detail.

    The breakdown shows that 86% of the market traded at a price higher than 85, with a weighted average bid of 97.5. In our view, this shows that there are still many attractive issues trading in the range between 85 and par. A loan priced at 85 that accrues to par over three years offers the potential for five points per year of market-value return on top of the 4.3% coupon.

    As might be expected, the distressed segment is dominated by oil and gas, commodities and utilities issuers, which comprise about 7% of the market and half of the 14% slice that trades under 85, with a weighted average bid of 54.2. Of great interest is the other half of the distressed segment, trading at a weighted average bid of 71.1. The segment encompasses numerous sectors, but without common factors depressing the prices, save the obvious one – investor sentiment. This is an instance where bond math can’t keep pace with the irrationality of the market, because the 71.1 price is equivalent to a prediction of 145% of those issues, representing $56 billion worth of loans, going bankrupt in three years.

    Bottom line: Eaton Vance has always believed that fundamental, bottom-up analysis is the key to success in the loan market. That is especially true today, where the discrepancy between fundamental analysis and market prices has produced an extraordinary range of value opportunities.

    Scott Page, CFA

    Co-Director of Bank Loans

    Eaton Vance

    Craig Russ

    Co-Director of Bank Loans

    Eaton Vance

    The range of value opportunities becomes more apparent with additional market pricing detail.

    Latest advisory blog entry

    March 31, 2016 | 4:00 PM

    Yellen’s true feathers are showing through

    While many observers assumed she would be dovish when she took over leadership of the Fed, Chair Janet Yellen has generally struck a more centrist and neutral tone during her 2.5 years of leadership. However, over the past few weeks she has certainly channeled her inner dove.

    Beginning with the most recent FOMC statement and press conference , she offered a significantly more dovish tone and more cautious approach to rising rates. At Yellen's speech Tuesday at the Economic Club of New York, she had every opportunity to walk back her dovishness from the last Fed meeting. However, her tone was even more dovish and she continued to highlight an even more cautious approach to raising rates.

    When the Fed seems to change tone, many in the market place worry that "the Fed knows something the market doesn't.” I tend to think that the Fed doesn't really have any better insight into the economic outlook than the market does. So when the Fed changes tone, it should be viewed as a reaction function change. It can also be difficult to interpret the Fed's message due to diverging viewpoints of the Federal Open Market Committee (FOMC) members. After the last FOMC meeting, we had a cacophony of more hawkish Fed rhetoric last week, which appeared to be trying to counter that meeting’s dovish message.

    While there is dissent within the FOMC right now, I think it is clear that Yellen has changed her reaction function. I think there is increasing pressure on Yellen and others at the Fed to proceed cautiously with the rate-hiking cycle given the challenges in many parts of the world. These international issues have been prevalent for some time, though, so her change in tone now is noteworthy.

    There has been significant market chatter about a possible accord at the February G20 meeting in Shanghai: The Fed would be cautious in raising rates so as to not push the U.S. dollar significantly higher, and other major central banks would focus their additional monetary stimulus on domestic credit markets as opposed to a beggar-thy-neighbor currency weakness through negative rates. While it’s impossible to know exactly what happened, market price action and central bank action since seems to give credence to this line of thinking.

    This newfound dovishness should be supportive of global credit markets as well as emerging-market assets. In addition, inflation breakevens appear attractive and we think the yield curve* is more likely to steepen now in a modestly rising inflation environment. While we think talk of U.S. dollar strength has been overplayed in the media (the dollar has actually weakened over the past year), certainly the dollar is less attractive under a more dovish Fed.

    Bottom line: Data still matters, but the Fed is decidedly less data-dependent than two weeks ago. Given our positive view on the U.S. economy, there may well be another round of U.S. dollar strength, especially if the Fed is forced to raise rates faster than expected after letting inflation overheat a little bit.




    *Yield curve is a graphical representation of the yields offered by bonds of various maturities.

    Investments in foreign instruments or currencies can involve greater risk and volatility than U.S. investments because of adverse market, economic, political, regulatory, geopolitical or other conditions. In emerging countries, these risks may be more significant. An imbalance in supply and demand in the income market may result in valuation uncertainties and greater volatility, less liquidity, widening credit spreads and a lack of price transparency in the market.

    Eric Stein, CFA

    Co-Director of Global Income

    Eaton Vance

    This newfound dovishness should be supportive of global credit markets as well as emerging-market assets.

    Latest advisory blog entry

    March 30, 2016 | 3:00 PM

    Why the recent pullback is a healthy sign

    I had the flu last weekend and it was awful. I would vacillate from freezing cold to spiking a temperature. The markets work in a similar fashion and can cause similar emotions if left unchecked. It’s bad news to have a spike in temperature for too long.

    For the health of what we see as a continued rally, last week represented a healthy pullback. This is not reason for concern, rather an opportunity for us to assess where we are, affirm our positioning and use the pullback to add where we can. We are loath to chase prices in a rallying market if we can avoid it.

    Let’s take a step back for a moment. The period from January to early February represented an unsustainable extreme in the bottoming process. This was the chill with a fever to follow. Trading was thin, and values were extreme and emotional. The move from the $20s to the $40s per barrel in oil was likely not on any single new piece of information or catalyst. It was based on sentiment swinging too far and an assessment of the likelihood of what is being priced in the market actually occurring.

    The market will not move up in a straight line. Never has, never will. Pullbacks are a healthy development in the maturation and shift in a cycle but, without them, we would not have second chances. Without them, our philosophy of patience would require surgeon-like precision in our timing. Instead, we would rather provide liquidity by buying when others are selling, and in a market typified by rising prices, this is when we get to do so. The long view allows us to see past short-term positive returns, which satiate many, to far greater longer-term returns.

    Perhaps the biggest takeaway here is that it is our goal to stay invested with desired exposure so we can experience this strength. Pullbacks are an ideal time to fill in positions, use flows to add to new names we have on the watch list and assess value. We are not anchored by the most recent move higher. We look at each position as if we were buying them for the first time today.

    Bottom line: I went to the gym my first day back from the flu and could only run a mile on the treadmill. This past weekend, I saw improvement. These things never move in straight lines.

    Henry Peabody, CFA

    Diversified Fixed Income Portfolio Manager

    Eaton Vance

    It is our goal to stay invested with desired exposure so we can experience this strength.

    Latest advisory blog entry

    March 29, 2016 | 4:00 PM

    5 ways the ACA will affect retirees

    The Affordable Care Act (ACA) has had a significant effect on retiree health care costs and retirement planning, and those effects are only likely to increase in the years ahead. People nearing or in retirement need to understand the extent to which their medical expenses are likely to increase, and steps they can take now to help ensure they will be able to afford medical care after they retire.

    A new white paper discusses this issue in detail. It notes that the ACA – as well as the operation of the health care sector generally – is likely to affect the costs of medical outlays in retirement in a number of significant ways:

    1. Imposition of a 3.8% tax on investment income

    The ACA imposes an additional 3.8% tax on investment income to the extent it is received by families with income in excess of $250,000. Due to this significant increase in tax rates, investors who rely on investments to fund their retirement are finding that their after-tax income is not as high as they expected.

    2. Reduction in Medicare reimbursement rates

    The 3.8% tax covers about half of the expected outlays under the ACA. The remaining outlays are covered by a reduction in the reimbursement rates paid to doctors who see Medicare patients. This reduction in reimbursements has led a number of doctors to stop seeing Medicare patients altogether. As a result, retirees who want medical care from a particular doctor might find themselves having to pay for the treatment and then recover what they can under Medicare.

    3. Shifting of costs to insureds

    Policyholders are likely to face higher premiums and reduced policy benefits as insurance companies remaining in the program seek to reduce losses associated with coverage of insureds with pre-existing illness conditions. These changes to conventional insurance arrangements are likely a precursor to similar changes to the arrangements upon which retirees rely.

    4. Move toward outcome-based medicine

    As baby boomers age, the cost to the government of Medicare coverage is going to outstrip the associated revenue the government receives. It is reasonable to expect Congress, at some point, to enact legislation that curtails procedures and treatments eligible for Medicare reimbursement under the precept of “outcome-based” medicine, particularly near the end of life when the sustainable benefits of the procedures are less certain. The costs of those procedures thus will be shifted to the individual.

    5. No national plan for long-term care coverage

    As life expectancies increase, the need for – and cost of – end-of-life medical care also increases. As finally implemented, the ACA does not enhance the availability of long-term care insurance. As baby boomers age, the availability of that insurance is likely to decline, and the cost of the policies is likely to increase.

    Bottom line: The above trends make clear that medical costs are not going to decrease, and that preparing to pay them before and during retirement is crucial. Working with a financial advisor, investors approaching retirement can estimate their annual medical outlays in retirement and prepare a suitable investment plan to produce after-tax income that may be used to help defray those costs.




    Andrew H. Friedman is the principal of The Washington Update LLC and a former senior partner in a Washington, D.C. law firm. He and his colleague Jeff Bush speak regularly on legislative and regulatory developments and trends affecting investment, insurance and retirement products. They may be reached at www.TheWashingtonUpdate.com.

    Andrew Friedman

    Principal

    The Washington Update

    People nearing or in retirement need to understand the extent to which their medical expenses are likely to increase.

    Latest advisory blog entry

    March 28, 2016 | 10:30 AM

    Subprime auto loans not in the breakdown lane yet

    Recent sensational headlines about asset-backed-securities (ABS) secured by subprime auto loans would have you believe this sector of the investment-grade bond market requires emergency roadside assistance. But, like automobiles, subprime auto loans are not all created equal and, therefore, it can be misleading to paint all subprime auto loan ABS with the same brush.

    The word “subprime” conjures up memories of the massive defaults in home mortgage loans that ignited the financial crisis, but auto loans performed surprising well during that period, as consumers typically prioritized their car loan payment over other expenditures. As a result, the high-quality AAA and AA sectors of the ABS market did not incur any impairment (Source: Barclays).

    Subprime auto lenders reacted to the financial crisis by tightening underwriting standards, which resulted in more loans to better-quality subprime borrowers. At the same time, ratings agencies required the AAA and AA tranches to represent a smaller portion of an ABS deal structure so that there would be more credit support to mitigate the impact of future expected loan losses. Both of these measures have benefited ABS investors and led to positive loan performance following the financial crisis.

    However, with the U.S. economy improving and auto sales on the rise, new auto lenders have entered the market and competition for new auto loans began to increase. As a result, performance of the overall subprime auto loan market has started to return to more normalized levels.

    One less well-known aspect of performance is that subprime auto loans follow a strong seasonal pattern that shows defaults peaking in November and again in February (presumably correlated to holiday shopping excesses) and bottoming out in May and June (when extra cash is received from tax returns). While most subprime loan portfolios follow this pattern, some have significantly wider performance swings than others, reflecting their higher credit risk. A portion of the recent “headline-grabbing” increase in subprime delinquencies is likely attributable to this seasonal factor.

    The subprime auto loan indexes that show a rising trend in delinquencies are comprised of loans to a wide range of borrowers, from moderately weak to highly speculative, and from a number of different originators. The mix of subprime auto lenders in the indexes has shifted over time, as several new lenders have flooded the market. Because the newer subprime auto lenders tend to underwrite more risky loans, on average, the performance of the indexes has been deteriorating. Again, we avoid ABS deals backed by deep subprime borrowers or issued by newer originators that lack the experience of underwriting through a full economic cycle.

    Bottom line: While we are seeing some modest deterioration in subprime auto loan performance in general, the levels remain within our expected range, given where we are in the credit cycle. We continue to be selective in our exposure to subprime lenders to distinguish the Pintos from the Porsches.




    Past performance is no guarantee of future results.

    An imbalance in supply and demand in the income market may result in valuation uncertainties and greater volatility, less liquidity, widening credit spreads and a lack of price transparency in the market.

    Jeffrey Boutin

    Senior Structured Finance Credit Analyst

    Eaton Vance

    Bernie Scozzafava

    Diversified Fixed Income Portfolio Manager

    Eaton Vance

    We continue to be selective in our exposure to subprime lenders.

    Latest advisory blog entry

    March 24, 2016 | 10:45 AM

    What more disclosure means for muni bonds

    A new proposal requiring brokers to disclose markups and markdowns is making headlines in the fixed-income space, and we think it could cause a massive shift in the municipal bond market.

    Late last month, FINRA approved a proposal that seeks to provide important price disclosure to retail investors. FINRA’s proposal promises to affect all fixed-income securities, and here are the key details:

    • Member firms would be required to disclose the markup or markdown from prevailing market value.
    • Confirmation of the markup or markdown from the prevailing market price for the security would need to be provided to the investor.
    • The confirmation needs to include a reference (and a clickable hyperlink if the confirmation is electronic) to trade-price data in the same security.
    • The disclosure requirement will not apply to transactions in fixed-price new issues, or in situations where the bonds sold to the investor (or bought from the investor) were held by the firm longer than one day.
    • The proposal is still subject to the approval of the Securities and Exchange Commission (SEC).

    While this proposal affects all fixed-income securities, we think it will have the biggest impact on muni bond market. FINRA joins the Municipal Securities Rulemaking Board (MSRB) and the SEC in pushing for more transparency into the transaction costs paid by retail municipal bond investors – buyers who make up 42% of the market.

    According to a study performed by the Securities Litigation and Consulting Group, it is estimated that customers paid more than $10 billion in excessive markups and markdowns on municipals between 2005 and 2013. At the moment, investors may not be fully aware of these costs. That could change in 2016.

    We believe there will be difficulty defining exactly what the “prevailing market value” for a security is at the time of transaction. There is also a question on the implementation of this new proposal, should it receive SEC approval. Like FINRA, we expect the MSRB to approve this proposal in the coming months, with the possibility of SEC approval within the next 12 months.

    Bottom line: As this proposal shows, the muni market faces significant changes ahead. We believe that a rule requiring brokers to disclose markups on trade confirmations could cause a massive shift away from the traditional transaction-based model. We think that investors and their advisors may want to consider partnering with a professional muni manager ahead of this likely change.




    The success of any investment program depends on portfolio management's successful application of analytical skills and investment judgment. Active management involves subjective decisions.

    An imbalance in supply and demand in the municipal market may result in valuation uncertainties and greater volatility, less liquidity, widening credit spreads and a lack of price transparency in the market. There generally is limited public information about municipal issuers. As interest rates rise, the value of certain income investments is likely to decline. Longer-term bonds typically are more sensitive to interest-rate changes than shorter-term bonds.

    Chris Harshman, CFA

    Municipal Portfolio Manager

    Eaton Vance

    We think it will have the biggest impact on muni bond market.

    Latest advisory blog entry

    March 24, 2016 | 11:30 AM

    Why it can pay to go against the retail flow

    Along with the crocuses that are starting to push above ground this spring, there are early signs in the floating-rate loan market that retail investors have begun to regain their appetite for the asset class.

    In the first three weeks of March, loan mutual funds experienced $322 million of net inflows – a modest sum, to be sure, but nonetheless the first month of positive inflows since July 2015, according to Lipper Analytical Services. That boomlet helped add two points to the recent low point of the S&P/LSTA Leveraged Loan Index*, bringing its average loan price to 91.3, as of March 18.

    While we believe loans in general are still undervalued today, it remains to be seen whether the recent rebound will be sustained. However, it is a good occasion to gain some perspective on what retail flows mean for the loan market. The chart below shows that loan market outstandings have grown to around $880 billion over the past 15 years, even as retail interest has waxed and waned.

    The asset class has flourished because the loan market has always been, and remains, primarily an institutional arena, from structured products to pension plans to endowments and foundations. Last year was an excellent example. Supply and demand were roughly in balance even as the volume of outstanding loans grew by some $50 billion. Technical conditions in total were only net negative thanks to $26 billion of outflows from retail loan funds – the dominant force behind the price deterioration in 2015.

    Today, the retail component of the market has fallen from a peak of 24% in 2013 to approximately 13% – the smallest share since 2010. In terms of the impact on loan prices relative to loan funds’ slender slice of the market, 2015 (and 2014 for that matter) was truly a case of the retail tail wagging the dog. But, this phenomenon would help the market if inflows continue, or spark less volatility over time if withdrawals resume – assuming continued market growth and a shrinking funds base. There has also been a natural reversion-to-the-mean phenomenon in this asset class.

    Bottom line: Loans have returned more than 99% of principal since 2001 and yielded about 500 basis points of annual income, according to S&P Capital IQ/LCD. While price volatility will always be a fact of life, the track record of loans has shown that investors have been better served by focusing on fundamentals and the long-term strength of the asset class – or by going against the flow of the short-term dislocations caused by the retail masses.




    *The S&P/LSTA U.S. Leveraged Loan Index is designed to reflect the performance of the largest facilities in the leveraged loan market.

    Past performance is no guarantee of future results.

    An imbalance in supply and demand in the income market may result in valuation uncertainties and greater volatility, less liquidity, widening credit spreads and a lack of price transparency in the market. Bank loans are subject to prepayment risk. Purchases and sales of bank loans in the secondary market generally are subject to contractual restrictions and may be subject to extended settlement periods.

    Scott Page, CFA

    Co-Director of Bank Loans

    Eaton Vance

    Craig Russ

    Co-Director of Bank Loans

    Eaton Vance

    Retail investors have begun to regain their appetite for the asset class.

    Latest advisory blog entry

    March 23, 2016 | 12:30 PM

    Managing dividends for taxes

    Dividend investing has historically offered compelling long-term opportunities for total return and income. But the continued low interest-rate environment and recent bouts of volatility in markets have resulted in disappointment for many investors searching for total return opportunities.

    Despite these challenges, we think dividend-paying stocks continue to be an attractive source of current income, especially when compared to some fixed-income assets that are yielding relatively little in today’s low-yield environment. Through careful selection of dividend-paying equities, investors may be able to realize attractive total return through a combination of capital appreciation and dividend income.

    However, many equity investors tend to underestimate — or overlook entirely — the impact of taxes. At Eaton Vance, we believe it’s not about what you make, it’s what you keep. A tax-managed equity strategy may employ a number of techniques to help ease investors’ tax burden, including taking steps to minimize capital gains and avoiding fully taxable dividend income.

    Dividend-paying stocks can play a significant role in many investors’ portfolios thanks to the favorable tax treatment of dividends. Under the American Tax Relief Act of 2012, qualified dividend income (QDI) is taxed at the lower long-term capital gains rates. Tax-managed equity funds typically follow holding period rules to have any dividends qualify to be taxed at the lower QDI rate.

    In particular, investors may find tax-managed dividend income funds attractive, as a high proportion of these funds’ total returns come in the form of dividend income, which is taxed at the lower QDI rate.

    Bottom line: Appropriate strategies to help mitigate the tax drag should be explored. By pursuing a sound, tax-aware investment approach, investors may be able to optimize the likelihood of reaching their long-term goals. Investors should consult their financial and tax advisors for more information.




    Eaton Vance does not provide tax or legal advice. Prospective investors should consult with a tax or legal advisor before making any investment decision.

    The success of any investment program depends on portfolio management's successful application of analytical skills and investment judgment. Active management involves subjective decisions.

    Fund performance is sensitive to stock market volatility. Market conditions may limit the ability to generate tax losses or to generate dividend income taxed at favorable tax rates. The Fund's ability to utilize various tax-managed techniques may be curtailed or eliminated in the future by tax legislation or regulation.

    Michael Allison, CFA

    Equity Portfolio Manager

    Eaton Vance

    Dividend-paying stocks can play a significant role in many investors’ portfolios thanks to the favorable tax treatment of dividends.

    Latest advisory blog entry

    March 22, 2016 | 11:30 AM

    Don’t let capital gains catch you by surprise

    As we approach Tax Day, many mutual fund investors may be surprised to discover that they owe taxes on capital gains distributions they received during the year, even though a large number of funds lost value over the past year.

    What happened?

    In 2015, the S&P 500 Index return was a low 1.4% and many mutual funds delivered similarly low and even negative returns. Yet despite weak performance, many funds distributed sizable realized gains. Our analysis of gains distributions from U.S. mutual funds showed that gains distributions in 2015 were only slightly lower than 2014, despite a significantly weaker market. In 2014, the S&P 500 return was much higher, at 13.7%. Taxable realized gains distributions may be expected when markets are up, but capital gains distributions in a relatively flat market may be surprising.

    Why did this happen?

    Capital gains in mutual funds are often triggered by various types of manager trading, including trades related to their strategy or rebalancing, or trades from shareholder fund redemption requests. Strategy- or rebalancing-related trades may trigger a gain when the fund manager decides to sell a security that has reached their target price. However, gains can also be triggered by redemption requests from fund investors. According to Morningstar Direct, U.S. equity funds showed net year-to-date outflows through September 30, 2015. Outflows resulting from investors leaving a fund can cause a distribution of realized gains to remaining shareholders because the fund manager may sell appreciated assets to satisfy the redemption.

    What can investors do?

    Gains distributions from funds affect an investor’s after-tax return. According to Eaton Vance’s recent ATOMIX survey, almost two-thirds (61%) of advisors believe their clients do not understand the effective tax rate on their investments, and that more than four in 10 investors (44%) are unlikely to know what percent of their returns is needed just to cover their tax bill.

    One way to manage the tax associated with gains distributions is to offset them with harvested losses. While most financial advisors do recognize the value that harvested losses can offer their clients, 45% of advisors in the ATOMIX survey only seek losses once a year, at year-end.

    To avoid these taxes coming as a surprise, investors should seek to educate themselves about the impact of taxes and their effective tax rates. This can help to avoid some of the surprise, and highlights the value of adding a tax-managed component to their portfolios.

    Bottom line: By using tax management techniques like harvesting losses and deferring gains, investors in tax-managed index-style accounts can hope to offset some of these gains.




    Eaton Vance does not provide tax or legal advice. Prospective investors should consult with a tax or legal advisor before making any investment decision.

    The success of any investment program depends on portfolio management's successful application of analytical skills and investment judgment. Active management involves subjective decisions.

    Rey Santodomingo, CFA

    Director of Investment Strategy-Tax Managed Equities

    Parametric

    Investors should seek to educate themselves about the impact of taxes and their effective tax rates.

    Latest advisory blog entry

    March 21, 2016 | 4:00 PM

    For Brazil, no glimmers of light yet

    With so many headlines recently over politics and economics in Brazil, we wanted to provide an update on recent events and the market volatility that has followed.

    Over the past two years, Brazil’s economy has suffered from a terms-of-trade shock as well as simultaneous fiscal and political crises. These shocks have led to seven straight quarters of economic contraction (the longest recession since at least the Great Depression era of the 1930s) and multiple credit rating downgrades, leaving Brazil’s sovereign credit rating back in “junk” territory by all of the major ratings agencies.

    With the exception of large currency depreciation, Brazil’s progress adjusting to these shocks has been limited. Fiscal deficits have grown larger and public debt levels higher with no sign of debt sustainability in sight. To make matters worse, President Dilma is currently defending herself in congressional impeachment hearings while former President Lula and the heads of both of the lower and upper houses of Congress have been implicated for corruption from testimony received from the ongoing Operation Carwash investigations.

    Brazilian assets have rallied the last few weeks, as the market has interpreted negative news related to President Dilma as positive for the country. The thinking is as follows: Dilma’s removal may ease the political gridlock currently paralyzing the policy process, which would allow the government to develop and implement a plan that puts the country’s debt trajectory on a sustainable path and that improves the economy’s competitiveness. Such thinking may prove correct in the long run, but impeachment will likely be a messy process and even if Dilma is removed, the political establishment will still be plagued by unscrupulous personalities, vested interests and party factions. The path to debt sustainability and greater economic competiveness will be a long one.

    From a long-run perspective, we think Brazilian assets offer a lot of attractive opportunities. But, the recent market rally has priced in the best possible near-term outcome even though the outlook is fluid and uncertain.

    Bottom line: Expect more market volatility in Brazil in the months to come until the government, regardless of who is running it, is able to articulate and implement a more coherent policy path forward. Only at that point will we be able to say that there is some light emerging at the end of the tunnel.

    Matt Hildebrandt

    Global Credit Strategist

    Eaton Vance

    Expect more market volatility in Brazil in the months to come.

    Latest advisory blog entry

    March 21, 2016 | 11:00 AM

    The importance of REITs in a portfolio

    Investors are hungry for yield, but few consider established investment options outside of dividend-paying equities or bonds. With so many investment options out there, we think that an investor should save room in their portfolio for real-estate investment trusts, or REITs.

    Here are three reasons why:

    • Dividends or current income. REITs are required to pay out at least 90% of taxable income. As such, the yield on REITs has historically been considerably higher than other equities.
    • Diversification. REITS are a distinct asset class, different from bonds and equities. REITs help investors get direct exposure to traditionally illiquid real-estate markets (commercial, residential, industrial, etc.) and on a wide geographic basis.
    • Inflation hedge. In a rising price environment, rents and property prices have historically climbed. This type of inflation hedge may protect investors. In fact, REIT dividend hikes have increased more than the Consumer Price Index in all but two of the past 20 years, according to data from the National Association of Real Estate Investment Trusts (NAREIT).

    Bottom line: We think REITs are an important source of income and diversification, and they may also help hedge against inflation. With the potential for rising long-term rates and concerns about inflation, we think that REITs could defy market expectations and outperform the broad market.




    Diversification cannot ensure a profit or eliminate the risk of loss.

    Investment performance is sensitive to stock market volatility. Changes in real estate values or economic downturns can have a significant negative effect on issuers in the real estate industry, including REITs.

    Scott Craig

    REIT Portfolio Manager

    Eaton Vance

    We think REITs are an important source of income and diversification.

    Latest advisory blog entry

    March 18, 2016 | 9:45 AM

    Can Chicago manage its pension costs?

    SECOND IN A SERIES

    Two weeks ago, we offered a view of how vastly different the situations and trends are for Chicago now compared with Detroit when it filed for bankruptcy. Today, we highlight the long-term funding projections of Chicago pension plans and what these projections mean for investors.

    Chicago has consistently underfunded its pension plans, which has resulted in the funded ratio of the city’s four main pension plans to fall from 85% in 2000 to just 35% in 2014, and has driven its credit rating to below investment grade. As recent bankruptcy filings by U.S. cities have been punctuated by elevated pension, OPEB (other post-employment benefits) and debt service costs, investors in Chicago debt are rightfully concerned.

    However, prior to 2016, Chicago’s annual pension contributions were not based on actuarially required contributions, which was one of the factors that led to the rapid deterioration of the funded ratio of the plan over the last decade. Importantly, starting in 2016, Chicago will be required by state law to significantly increase its annual pension contributions; this requirement led to a 134% increase in the city’s pension contribution in fiscal 2016. In anticipation of the massive pension funding increase, the Chicago City Council last year passed a $543 million property tax increase to be phased in over four years and a $100 million increase in garbage collection fees.

    With these revenue increases, Chicago’s ability to meet its statutorily required pension contributions has substantially improved. Further, if Chicago does not meet their statutorily required pension contributions going forward, the State of Illinois can withhold grant funds to the city and deposit the withheld funds into the pension funds. Based on these significant changes, Chicago expects to reach an aggregate funded status of 70% by 2040, as shown in the chart below.

    However, we believe that the chart above is a best-case scenario for Chicago’s projected funded ratio. For example, the chart has three major assumptions that will likely not be realized:

    • It assumes that pension reforms related to two of Chicago’s four pension plans, which have been determined to be unconstitutional by the Circuit Court of Cook County, are approved by the Illinois Supreme Court.
    • It assumes that Chicago will contribute $1.1 billion to the pension plans in 2016, when the city’s budget only assumes that $886 million will be contributed.
    • It assumes that Chicago’s annual pension contributions will increase by 8% each year from 2017 through 2021 (and then slow to 3% from 2022 to 2026). Chicago has stated that legislation allowing lower contributions may be “necessary to allow the City and its taxpayers to absorb the impact of substantially increased pension payments over a longer period of time.”

    Bottom line: Chicago still faces an uphill battle with legacy pension issues. That said, the steps Chicago is taking to meaningfully address their pension issues, as well as the fact that Chicago home prices have increased 16% over the past five years, should help the city steady a pension system that was chronically underfunded for the past decade.

    We will conclude our series of Chicago-related posts next week with a look at the relative value of Chicago’s debt.

    William Delahunty, CFA

    Director of Municipal Research

    Eaton Vance

    Chicago’s ability to meet its statutorily required pension contributions has substantially improved.

    Latest advisory blog entry

    March 17, 2016 | 10:15 AM

    Politics and P/E ratios

    Politics and investing make strange bedfellows. I generally advise investors not to let their political views dominate their investment decision-making. Political rhetoric is chock-full of hyperbole and concepts that have little chance of becoming reality. What’s more, regulation and legislation usually have unintended consequences that impact our economy and stock market with unfathomable leads and lags.

    That said, I think the current political environment has put a lid on U.S. stock prices, and I doubt that last May’s record high of 2130 for the S&P 500 stock index will be surpassed within the next 12 to 18 months.

    Why the glum outlook? Corporate earnings growth has stalled, as emerging market economies have faltered and world industrial commodity prices have declined. The S&P 500 Index earned about $118 in both 2014 and 2015; it’s unlikely to do much better in 2016. For the stock market to advance, we need price/earnings (P/E) ratios to expand. But that’s unlikely given the uncertainties associated with the upcoming presidential election.

    What’s clear from the recent political chaos is that Americans are in a foul mood and “the establishment” within both parties is under attack. Front runners in both parties have singled out international trade policy as the raison d’etre for our economic problems. Protectionist sentiments are on the rise. Free trade has apparently become a losing political issue for both sides. The candidates want to talk about air conditioner maker Carrier shifting 2,100 manufacturing jobs to Mexico, but nobody mentions the thousands of U.S. manufacturing jobs created when BMW expanded its plant in South Carolina or Kia expanded in Georgia.

    The trade issue is an important concern. International trade has been a major driver of U.S. and global economic growth for the past few decades. Currently 35% to 40% of S&P 500 revenues are foreign sourced and 13% of U.S. gross domestic products (GDP) are exports. When measured as a percent of GDP, exports are more than three times as important as housing to the U.S. economy.

    Bottom line: For most of the past two years, the P/E ratio for the S&P 500 has ranged between 16 and 18. At this writing, the S&P 500 Index is at 2012 or 17 times its earnings. It’s hard to make the case that the market’s P/E should expand when both Republicans and Democrats are bashing big business.

    Bill Hackney, CFA

    Senior Partner

    Atlanta Capital Management

    I generally advise investors not to let their political views dominate their investment decision-making.

    Latest advisory blog entry

    March 17, 2016 | 4:00 PM

    Loan rebounds are par for the course

    The floating-rate loan market has come through a difficult period, with prices falling by 8.4% from June 2015 through February 2016. This nine-month stretch qualifies as the longest consecutive streak of negative returns since the inception of the S&P/LSTA Leveraged Loan Index* (the Index) in 1997.

    Fortunately, the loan market has a history of rewarding patience, as the chart below demonstrates. The chart shows the 10 worst nine-month performance periods, as measured by market-value price declines. The bar next to each sell-off is the subsequent two-year cumulative total return.

    The period ended in February ranks as the third worst ever, coming behind two closely spaced downturns during the financial crisis. The most recent period follows a nine-month smaller sell-off of 3%, ending in December 2014.

    But as we can see in the chart, downturns have been followed by strong upturns. For perspective, consider that since the Index inception in January 1997, loans have had an average annual total return of 4.8%; compounded monthly over two years, that return comes to 9.8%.

    However, the two-year cumulative returns following the 10 sell-offs range from a low of 6.3% to a high of 67.0%, with a median of 14.2% – seven of the eight bouncebacks exceeded the 9.8% long-term average (The one exception – the weak 6.3% bounceback 2001 following the tech bust – followed a mild sell-off of just 1.8%). Moreover, most of those two-year returns were more than twice the losses in the preceding nine-month period.

    But the picture for loans is actually stronger than this snapshot shows. We use market prices – not total return – on the downside because these are visible “headline” figures, not including the return from income. For example, the total return for the recent nine-month period was negative 4.9% -- the 8.4% market value decline was partially offset by 3.5 percentage points of interest.

    In our view, the explanation for this pattern lies in the vagaries of investor sentiment. Credit trends over the course of business cycles certainly drive loan valuation, but such factors are amplified by retail activity, which can push prices above or below fair value.

    Bottom line: The history of loan performance shows that in the wake of nine-month sell-offs, like the one we have experienced recently, we see a strong case for floating-rate loans, whether establishing or adding to positions, or just standing pat.




    *The S&P/LSTA U.S. Leveraged Loan Index is designed to reflect the performance of the largest facilities in the leveraged loan market.

    Past performance is no guarantee of future results.

    An imbalance in supply and demand in the income market may result in valuation uncertainties and greater volatility, less liquidity, widening credit spreads and a lack of price transparency in the market. Bank loans are subject to prepayment risk. Purchases and sales of bank loans in the secondary market generally are subject to contractual restrictions and may be subject to extended settlement periods.

    Scott Page, CFA

    Co-Director of Bank Loans

    Eaton Vance

    Craig Russ

    Co-Director of Bank Loans

    Eaton Vance

    The loan market has a history of rewarding patience.

    Latest advisory blog entry

    March 16, 2016 | 12:15 PM

    Is this rally for real?

    Risk markets have made a stellar comeback after the worst start to the year since the Great Depression. Is that enough to convince everyone it’s time to go all in? No. The question on everyone’s mind and perhaps yours: Is this rally for real?

    I think the answer is yes, and here are a few reasons why:

    • Oil: When crude oil broke through $30 per barrel, there was a reversal driven by short covering. This allows the fundamentals to take over and have more influence. And those fundaments are turning positive. The International Energy Agency (IEA) had positive news this week on the supply side with U.S. production registering a decline. The Saudis are now operating at capacity, and there are reports of difficulties in both Iran and Iraq getting production online. All of this points to a tighter market.
    • Emerging markets (EM): EM has also moved higher since China began its PR campaign in the beginning of the month, better articulating its commitment to growth. Capital outflow has slowed and the Chinese government is using monetary and fiscal levers to aid the economy. Stability and confidence are coming back and that positive tone is spreading to other emerging markets, which leads me to my final thought on currency.
    • Currency: The end of quantitative easing (QE) has brought a tremendous amount of volatility. Getting off zero was never going to be easy, and the U.S. dollar has borne the brunt of the battle. The U.S. and China are now the two largest economies and the U.S. cannot take more dollar strength without it impacting the domestic economy. China cannot depreciate rapidly without creating global instability. Everyone needs more time to focus on their domestic economies, and monetary policy has really run its course. I think what we’re seeing is a move away from fiscal austerity and more of an acceptance that fiscal levers are the way to go.

    Bottom line: There is no global recession in sight. In fact, there is more likely an inflation surprise on the horizon. I believe this rally is for real; it’s time to get aboard the train.

    Kathleen Gaffney, CFA

    Co-Director of Diversified Fixed Income

    Eaton Vance

    There is no global recession in sight.

    Latest advisory blog entry

    March 16, 2016 | 4:45 PM

    Fed doves are flying, but for how long?

    Today’s statement from the Federal Open Market Committee (FOMC) and its Statement of Economic Projections (SEP), which includes economic protections as well as the so-called “dot plot,” had a more dovish tone than expected. In some ways, it seems like it came from a month ago – before we saw the rally in credit, equity and commodities markets that has occurred over the past several weeks.

    While the Fed highlighted the recent firming in economic data, the phrase “global economic and financial developments continue to pose risks” really set the tone of the statement. When combined with the rest of the statement (as well as comments from Chair Janet Yellen), the Fed seemed to emphasize the financial market volatility that occurred during the first six weeks of 2016 and the global economic outlook, as opposed to overall improvement in both the U.S. economic outlook and financial market conditions that have occurred over the past month.

    Following the release of the statement and SEP:

    • Rates implied by fed fund futures fell (which made sense as the median dot now predicts two hikes from four hikes)
    • The U.S. dollar weakened
    • The yield curve* steepened significantly

    Additionally, I thought the Fed would leave the door open for an April Fed rate hike, and while it didn’t explicitly rule it out (Yellen did reiterate in the press conference that every meeting is a “live meeting”), nothing in the Fed’s statement indicated that it is likely to raise rates in April.

    A big point of questioning during Yellen’s press conference was on the recent uptick in inflation. While she acknowledged the recent uptick in inflation prints, she seemed to dismiss them by saying that recent inflation readings “may reflect transitory factors.”

    Bottom line: While the Fed’s concern about the global economic outlook is understandable, given that financial markets have rallied significantly over the past several weeks and the U.S. economy continues to improve (with close to full employment and as inflation ticks higher), the Fed may not be able to hold out much longer before it continues with its rate-hiking cycle.




    *Yield curve is a graphical representation of the yields offered by bonds of various maturities.

    Eric Stein, CFA

    Co-Director of Global Income

    Eaton Vance

    The Fed may not be able to hold out much longer before it continues with its rate hiking cycle.

    Latest advisory blog entry

    March 15, 2016 | 3:30 PM

    Can hospital bonds keep running?

    The Affordable Care Act (ACA) celebrates its sixth birthday next week, and this legislation has greatly benefited one specific part of the municipal bond market since its enactment: hospitals. However, we think investors will need professional credit research to navigate this shifting market over the long term.

    With millions of previously uninsured Americans gaining coverage, the ACA has been a positive recently for the hospital sector. The hospital component of the Barclays Municipal Bond Index* returned 4.09% in 2015 and 7.29% for the five-year period ended December 31, 2015. That compares to a one-year return of 3.30% and a five-year return of 5.35% for the broader index. As the chart below shows, hospital bond spreads** have narrowed considerably since the ACA became law (performance data from Barclays).

    The accelerated pace of mergers and acquisitions (M&A), a result of the ACA legislation, has contributed to recent positive performance. Large, highly-rated hospital systems are purchasing smaller, lower-rated hospitals to gain economies of scale and to more efficiently manage health-care delivery. Many of these lower-quality bonds generally increase in value when a larger health system assumes the responsibility for debt service repayment.

    Announced M&A deals in the hospital space jumped 18% in 2015 from the year before, according to advisory firm Kaufman, Hall & Associates, and have been trending upward since the ACA became law. Following along, ratings agencies have adopted a rosier view of the sector; per S&P Ratings, the health care sector had 83 upgrades and 46 downgrades in 2015, while Fitch Ratings upgraded 39 health-care issuers and downgraded only 11.

    Bottom line: We believe that ownership changes can create compelling opportunities in this area of the municipal market. However, due to the dynamic nature of government reimbursement levels going forward, selectivity in the hospital bond space will be important. Investors will need to rely on professional credit research to determine potential M&A candidates, as well as which states will be more favorably affected by shifting levels of reimbursements.




    *The Barclays Municipal Bond Index is an unmanaged index of municipal bonds traded in the U.S.

    **Spread is the difference between the yield of a security and a comparable duration U.S. Treasury.

    Past performance is no guarantee of future results.

    The success of any investment program depends on portfolio management's successful application of analytical skills and investment judgment. Active management involves subjective decisions.

    An imbalance in supply and demand in the income market may result in valuation uncertainties and greater volatility, less liquidity, widening credit spreads and a lack of price transparency in the market. As interest rates rise, the value of certain income investments is likely to decline. Investments in income securities may be affected by changes in the creditworthiness of the issuer and are subject to the risk of nonpayment of principal and interest.

    Adam Weigold, CFA

    Senior Municipal Portfolio Manager

    Eaton Vance

    We believe that ownership changes can create compelling opportunities in this area of the municipal market.

    Latest advisory blog entry

    March 15, 2016 | 4:30 PM

    No one ever grew wealth being scared

    Investors currently seem scared of everything. Stock market volatility, earnings, Federal Reserve policy, energy prices, China’s economy, terrorism, politics, Britain leaving the European Union and inflation are just a few of the many issues keeping investors fearful. This short-term market myopia seems like an opportune time for longer-term investors to take more risk.

    Over longer periods of time, returns have tended to compensate investors for taking risk. Although everyone is schooled on the concepts of risk and return, investors rarely take advantage of opportunities that might enhance long-term returns because they are too scared to do so. Instead, they cling to past performance believing historical outperformance will continue indefinitely.

    Capitalism is based on taking risk and being compensated for taking that risk. Within that context, investors who are always afraid and structure portfolios conservatively because of that fear should expect sub-par returns. Investors are herding because of fear, and not because of greed.

    Today’s investors generally believe that investing for income is safe whereas investing for capital appreciation is risky. Accordingly, income strategies are much more popular than are strategies based on capital appreciation. We strongly doubt that investing with the income herd will prove fruitful. Rather, we think investors should be looking to step away from the crowd, and better balance portfolios between income and capital appreciation.

    Bottom line: There is nothing wrong with income investing, but the opportunity cost of investing in fear and giving up potential capital appreciation might be substantial.




    Past performance is no guarantee of future results. Investment performance is sensitive to stock market volatility.

    Richard Bernstein

    CEO and CIO

    Richard Bernstein Advisors, LLC

    We think investors should be looking to step away from the crowd.

    Latest advisory blog entry

    March 14, 2016 | 4:00 PM

    Fed rate hikes are back on the table

    What should we expect from the Federal Reserve’s meeting on interest rates this week?

    A month ago, we were at the biggest stress point in markets. There was market chatter that the Fed may not hike at all or even cut this year, but I think a lot of that has changed given the rally in risk markets. In the time since the Fed’s last meeting on monetary policy, we’ve seen a rally in credit and equity markets, oil prices and inflation breakeven rates, as well as some weakness in the U.S. dollar. Additionally, data in the U.S. have been solid if not spectacular, which should allay any fears that a recession is imminent.

    While this should give the Fed more reason for confidence in continuing with its hiking cycle, I don't expect a rate increase at this week’s Federal Open Market Committee (FOMC) meeting. I think the Fed will want to give it more time to see how much, if at all, the economy was affected from the recent period of financial market volatility and the tightening of financial conditions.

    That said, I do think multiple Fed hikes in 2016 are squarely back on the table. I think the accompanying policy statement, the Statement of Economic Projections (SEP), the so-called “dot plot,” and the press conference will all be very interesting. For some time now, markets seem to think rate increases (or other policy action) will only occur at an FOMC meeting with a press conference. Going back some time, Yellen has tried to change this perception (with limited success) by saying things such as "Every meeting is a live meeting." I expect to see more of this type of language on Wednesday as I think the Fed will certainly put an April rate increase on the table - if the data and markets cooperate.

    Bottom line: I think the Fed will very much want to communicate that hikes are still coming in 2016 – a greater number than the market currently expects. I believe the Fed will start preparing markets for a possible April hike.

    Eric Stein, CFA

    Co-Director of Global Income

    Eaton Vance

    I believe the Fed will start preparing markets for a possible April hike.

    Latest advisory blog entry

    March 14, 2016 | 2:45 PM

    Two reasons to consider dividend stocks now

    Most investors recognize dividends’ importance in contributing a high percentage of a market’s total return. Currently, dividends contribute roughly 40% of the S&P 500 Index’s total return. In our view, two other reasons support including or adding to dividend equities in many portfolios.

    • In a world of low yields, equities are providing opportunity. The percentage of S&P 500 stocks with dividend yields greater than the 10-year U.S. Treasury is near all-time highs. Only a few years ago, many companies cut or abandoned dividend payments. The absolute number of S&P 500 companies paying a dividend fell to 360 in September 2009. Today, that number is back up to 420. At the same time, the absolute dollar value of payments has roughly doubled.
    • Investors continue to worry about slow growth in both developed and emerging markets. Dividend payers, on the other hand, continue to grow. The number of S&P 500 companies either initiating or growing their dividends has rebounded to levels not seen since the 1980s. At the low in 2009, only 144 S&P 500 companies either grew or initiated a dividend; as of February 2016, that number has grown to 321. It is clear to us that companies are rewarding their equity shareholders.

    Bottom line: In the present world of low yield, U.S. companies are rewarding their shareholders with more dividend options than ever. As we plan to show in an upcoming blog post next week, keeping a portfolio allocation with a dividend focus may offer the potential for higher returns and lower volatility.




    Investment performance is sensitive to stock market volatility. Changes in the dividend policies of companies could make it difficult to provide a predictable level of income.

    Charles Gaffney

    Equity Portfolio Manager

    Eaton Vance

    Kiersten Christensen, CFA

    Institutional Portfolio Manager

    Eaton Vance

    It is clear to us that companies are rewarding their equity shareholders.

    Latest advisory blog entry

    March 11, 2016 | 12:15 PM

    Income inequality and the election

    On Wednesday, I appeared on the CNBC Nightly Business Report to discuss how income inequality has fueled the rise of angry voters, and why this will be the foremost issue in the general election. Here are the speaking notes I prepared for the segment:

    • Both parties agree income inequality has increased. President Obama speaks about it frequently. Paul Ryan issued an extensive study on the topic in 2014.
      • The top 1% of earners receives about 22% of total income. These are the highest levels recorded since the government began collecting data a century ago.
      • S&P has concluded that widening income inequality has made the “economy more prone to boom-bust cycles and slowed the 5-year-old recovery from the recession.”
    • But, while the parties agree income inequality is a problem, they disagree greatly how to fix it. Income inequality is likely to be the major campaign issue in the general election.
    • Democrats tend to believe capitalism favors the rich and government must assume a greater role to redistribute income. They favor higher minimum wage, more government education programs and more government jobs programs. They would pay for these programs with higher taxes on the wealthy.
    • Republicans assert that the need is not to redistribute wealth but to achieve stronger economic growth. Government intrusion thwarts growth, dampens hiring and reduces the opportunity for lower socio-economic classes to improve through individual work and perseverance. They want lower taxes to reduce burdens on business owners and entrepreneurs.
      • Republicans assert the rich are already overtaxed: the top 1% of tax returns account for 37% of all federal individual income taxes paid (while recording about 22% of total income).

    Bottom line: Again, income inequality is likely to be the major campaign issue in the general election. Both parties are far apart on how to appropriately fix the widening gap. So this topic will bear watching in the months ahead.




    Andrew H. Friedman is the principal of The Washington Update LLC and a former senior partner in a Washington, D.C. law firm. He and his colleague Jeff Bush speak regularly on legislative and regulatory developments and trends affecting investment, insurance and retirement products. They may be reached at www.TheWashingtonUpdate.com.

    Andrew Friedman

    Principal

    The Washington Update

    Income inequality is likely to be the major campaign issue in the general election.

    Latest advisory blog entry

    March 11, 2016 | 3:45 PM

    Questions abound after ECB decision

    After disappointing markets with a lack of meaningful action in December, Mr. Draghi and the European Central Bank (ECB) made sure the world took notice with bold headline action in March. As a result, credit appears to be a clear winner after Thursday’s announcement.

    Blog posts yesterday laid out the ECB’s moves, including cuts to both the lending rate and deposit rate. From a global bond perspective, it was most surprising that the ECB added nonbank euro investment-grade corporate bonds to the basket of securities eligible for the central bank’s quantitative easing (QE) program. While the downgrade to growth and inflation forecasts that accompanied the ECB’s statement meant risk markets digested the news with varying degrees of enthusiasm, there is one clear winner among risk assets: credit.

    The ECB’s statement specifically stated that “investment-grade euro-denominated bonds issued by non-bank corporations established in the euro area” would be included in the list of assets eligible for purchase. The market is still waiting for clarity on some of the exact definitions surrounding “non-bank corporations.” Does this include insurance and other nonbank financials? And what does “established in the euro area” actually mean? Is this based on where the issuer is located or is this more focused on business activities of the corporate entity?

    These details will help determine the ultimate impact of this policy change, but the important fact is that the ECB could now be a buyer of first resort for a universe of corporate bonds that covers approximately 500 billion euros of securities, and that provides significant support for credit spreads.

    Bottom line: While purchasing corporate bonds doesn’t fix the issue of sluggish growth in the eurozone, it should help reduce credit risk premia more generally in the market. While the spill over effect into high yield is difficult to quantify, this incremental demand for credit is undoubtedly positive for all corporate spread products, and should serve as a tail wind for European high yield in the short term.




    An imbalance in supply and demand in the income market may result in valuation uncertainties and greater volatility, less liquidity, widening credit spreads and a lack of price transparency in the market. Investments rated below investment grade (typically referred to as "junk") are generally subject to greater price volatility and illiquidity than higher-rated investments.

    Jeff Mueller

    Portfolio Manager, Global Analyst

    Eaton Vance

    The spill over effect into high yield is difficult to quantify.

    Latest advisory blog entry

    March 10, 2016 | 4:00 PM

    The ECB’s monetary science experiment

    The European Central Bank (ECB) – and more specifically, Mario Draghi – delivered a strong message today in its policy announcement. After being criticized for “disappointing” the market after its last policy meeting in December, it appears that the ECB wanted to over-deliver.

    Before we look at the implications of the policy, it’s important to understand the details, and there are many:

    • The ECB reduced interest rates. The deposit rate charged to banks was reduced by 10 basis points (bps) to -0.4%. The main refinancing rate was cut by 5bps to 0%. The marginal lending facility rate was cut by 5bps to 0.25%.
    • The ECB upped its monthly bond purchases to 80 billion euro per month, an increase of 20 billion euro monthly. Market expectations were for only a 10-billion euro increase.
    • Euro-denominated corporate bonds are now considered eligible securities for ECB quantitative easing. The ECB is aggressively lowering the cost of funds and it is also signaling a willingness to socialize default risk.
    • Interestingly, the ECB added a new series of four-year loans to banks. These loans effectively offset some concern of negative rates hurting bank capitalization, and allow banks to buy back debt at a discount – improving their ability to lend.

    First and foremost, the monetary penalty of negative rates is something we are concerned about. The coordination of global central banks is another theme to consider. On one hand, we are witnessing a race to the bottom between Bank of Japan and ECB. Meanwhile, the Federal Reserve and People’s Bank of China want to march to their own drummers, but thus far are struggling to do so. We think the ECB’s move today could pressure the Bank of Japan to enact a stronger policy response. The chart below (from the latest Eaton Vance Monthly Market Monitor) shows how low key rates are around the globe at the end of February.

    Lower global rates could put upward pressure on the U.S. dollar, which would bring back a discussion of global agreement on currency and/or a delay in U.S. rate hikes. Again, this shows how hard it is for the Fed to march to the beat of its own drum. Global news now has a greater influence over all markets.

    The real solution is a focus on structural reform in the European Union; monetary policy is well acknowledged to be losing its potency. Addressing high unemployment, collective bargaining and labor/wage flexibility are some areas that need help, for example. What is also interesting is that today’s policy moves will likely encourage use of the bond market in Europe, whereas financing has traditionally been dominated by the banks.

    Bottom line: This is one big monetary science experiment and we don’t know how it will end. Today’s moves are designed to make investors more willing to take risk, but where are the best opportunities? From a multisector bond perspective, we think investors should consider credit opportunities, and we believe that Draghi’s actions are more supportive for U.S. credit markets, as Europe’s rates are too low relative to the U.S. Ultimately, we believe this type of policy action will lead to convergence – not divergence – in growth and interest rates, so investors may want to consider the bargains that exist in today’s markets.




    An imbalance in supply and demand in the income market may result in valuation uncertainties and greater volatility, less liquidity, widening credit spreads and a lack of price transparency in the market. As interest rates rise, the value of certain income investments is likely to decline.

    Henry Peabody, CFA

    Diversified Fixed Income Portfolio Manager

    Eaton Vance

    Today’s moves are designed to make investors more willing to take risk.

    Latest advisory blog entry

    March 10, 2016 | 3:00 PM

    Draghi misfires the bazooka

    Despite ongoing concern about the efficacy of negative interest rates, there were widespread market expectations for significant further monetary easing at today's European Central Bank (ECB) meeting. Recent ECB rhetoric had indicated that most ECB policymakers were dismissive of the criticism of further negative rates and thought recent economic and inflation data warranted further easing.

    Today, the ECB announced a refi and marginal lending rate cut of 5 basis points (bps) each and a deposit rate cut of 10 bps to -40 bps. Additionally, the ECB announced aggressive liquidity measures, including four-year LTROs (long-term refinancing operations) and an increase in monthly quantitative easing (QE) from 60 billion euros to 80 billion euros; the QE program also now includes nonbank corporate bonds.

    On one hand, these moves are very bold. Financial markets initially cheered this announcement, with risk markets (such as equities and credit) rallying and the euro declining. But the market has since digested this news; some risk markets are now broadly lower on the day, though credit markets are still on net stronger for the day (as of this writing). The euro is now trading up - not only against the U.S. dollar, but also against other major currencies. These measures seem specifically designed to help credit markets, so it isn't surprising that credit has held up better than other markets, even after the overall market reversal.

    While it is difficult to draw any strong conclusions on a day where markets are moving around a lot – it is likely position unwinding could be exacerbating price action – the turnaround seemed to occur when ECB President Mario Draghi stated at his press conference that the central bank has ruled out a tiered deposit system, as some other central banks with negative interest rates had done. He also mentioned that there is an inevitable floor on negative rates. These statements seemed to accentuate the markets' overall concerns and negative reactions to negative rates. The sense of central banks are out of further easing measures (even if they may not be) has led to episodes such as the January 29 Bank of Japan decision to go to negative rates; markets are reacting negatively to these announcements, even though these moves are specifically designed to strengthen them.

    Bottom line: While some of policies announced today should be broadly helpful for credit intermediation in Europe, Draghi's comments around the limits of negative rates seemed to drive markets in a different direction than the ECB would have likely have hoped for. Markets now are very attuned to the signaling guidance from policymakers' statements, as opposed to just the specifics of any program announced.

    Eric Stein, CFA

    Co-Director of Global Income

    Eaton Vance

    These measures seem specifically designed to help credit markets.

    Latest advisory blog entry

    March 9, 2016 | 12:45 PM

    Are high-yield bonds still a value?

    Last week, the high-yield bond market staged the strongest technical rally that we have seen in 5 years, culminating in a return of greater than 6% in just over three weeks. Given this broad move higher, many investors may wonder if high yield is still offering value.

    According to Lipper, the high-yield asset class garnered a record $5.0 billion of inflows last week. Due in part to this outsized shift back into the asset class, we think the technical bid will remain robust for the near term, as mutual funds are broadly underinvested and the issuance calendar remains light. Fundamentally speaking, particularly following oil’s strong move higher, we remain constructive on the high-yield market and believe the risk is slightly more to the upside for now.

    That said, we do not believe this nascent recovery is the preamble to a renewed bull market that will lead us back to the tight spreads* of 2014. Instead, we think a pattern of volatility could continue to play out over the next few quarters as global growth concerns, political uncertainty in an election year, commodity price movements and monetary stimulus remain top concerns.

    This backdrop led us to a meaningful widening and broad repricing of risk in our market. In this context, as we look toward the long term and based on spreads, we believe investors are still being compensated appropriately for risk. As such, there is great potential for future tightening and attractive returns for our shareholders.

    Let’s take a closer look at high-yield spreads. Last month, spreads peaked at 888 basis points (bps), marking the highest level since 2009. Since then, spreads have compressed by more than 170bps. However, at a spread of 711, high yield is still trading about 150bps wide to its historic average. Over the past 25 years, investors have historically earned double-digit returns in the three years following a spread greater than 650bps (spreads data from BofA/Merrill Lynch).

    To be sure, investors are right to be concerned about credit health in the energy, mining and materials sectors. However, the broad sell-off in high yield based on these worries certainly has created a buying opportunity. We think that there is more upside ahead. The market is already discounting default rates that are several times the current level. This suggests that investors with a medium- to longer-term horizon, who are comfortable with taking more risk and potential volatility, may want to consider high-yield bonds.

    Bottom line: It may make sense to consider dollar cost averaging in at this time and investing with an active manager with a process devoted to avoiding land mines. Active management, professional expertise and due diligence are key in this market.




    *Spread is the difference between the yield of a security and a comparable duration U.S. Treasury.

    Past performance is no guarantee of future results.

    Dollar-cost averaging does not guarantee profit or eliminate the risk of loss.

    The success of any investment program depends on portfolio management's successful application of analytical skills and investment judgment. Active management involves subjective decisions.

    An imbalance in supply and demand in the income market may result in valuation uncertainties and greater volatility, less liquidity, widening credit spreads and a lack of price transparency in the market. Investments rated below investment grade (typically referred to as "junk") are generally subject to greater price volatility and illiquidity than higher-rated investments.

    Kelley Baccei

    High Yield Portfolio Manager

    Eaton Vance

    We believe investors are still being compensated appropriately for risk.

    Latest advisory blog entry

    March 8, 2016 | 11:30 AM

    What transports tell us about the US economy

    The engine of growth in the U.S. economy is still very powerful. I believe the transports, in particular the railroads, are an important leading indicator for the U.S. economy. The good news is that the transports sector appears to be acting better.

    Railroads report weekly data, broken out by type of good shipped. “Intermodal” represents merchandise that is transported over two or more modes of transportation (i.e., ship, truck, rail, etc.). This is typically finished merchandise and, along with automotive, it offers a read on the volume of goods moving through the supply chain. The chart below shows why we were concerned in the fall, but have become optimistic in recent weeks.

    Six months ago, it seemed that not enough investors were focused on the possibility of recession in the United States. Recently, it seemed to be all that anyone wants to discuss, and has been priced in as a base case in certain industries (energy, materials and banks). Now, the stock market is beginning to take notice. Transportation stocks, which were weak all of 2015 and acted as the proverbial canary in the coal mine, are now up 11% since mid-January.

    Bottom line: As always, it pays to lean against consensus when things reach an extreme, particularly when the evidence is in dispute, like improving transports.

    Edward J. Perkin, CFA

    Chief Equity Investment Officer

    Eaton Vance

    Now, the stock market is beginning to take notice.

    Latest advisory blog entry

    March 7, 2016 | 11:00 AM

    Thoughts on the oil market

    Last week, our energy analyst spent several days in the Middle East and came away more constructive on the energy markets over the next two to three years. New OPEC (Organization of the Petroleum Exporting Countries) volumes will be more challenged than appreciated against a declining non-OPEC production profile. This will ultimately drive record inventories lower and prices higher.

    We note that:

    • Saudi Arabia theoretically has capacity of 12 million barrels per day (BPD), but we are led to believe its system cannot handle much more than 11 million BPD.
    • Iraq is a country in disarray. International partners are beginning to significantly curtail activity because they are struggling to get paid.
    • Libya has struggled to maintain oil production since 2014. Although a UN-backed peace agreement was signed in late 2015, it has not been honored to date, forcing longer delays to production restoration. Extended periods of infrastructure latency will hamper the ability for Libya to return production to pre-crisis levels.
    • Iran will have a difficult time finding financing to achieve its stated goals for production growth. The service companies were dismissive of any near-term prospects. Many believe that some Iranian oil has already been finding its way to market, which suggests the 500,000 to 600,000 BPD of consensus new volumes from Iran in 2016 is the upper limit.
    • The biggest shock of the trip was the heavy pressure on the service companies to cut pricing. Some are asking for 20%-25% price reductions in the region.

    On the demand side, Autodata just reported that U.S. SUV sales are up 10% year over year, with 742,000 units sold in February. In China, 785,000 SUVs were sold in January 2016. This was up 61% year over year.

    Bottom line: New supply from OPEC may be limited, which is supportive for oil prices over the next two to three years. As a result, we favor exploration and production (E&P) over service companies.




    Investment performance is sensitive to stock market volatility. Investments in foreign instruments or currencies can involve greater risk and volatility than U.S. investments because of adverse market, economic, political, regulatory, geopolitical or other conditions.

    Edward J. Perkin, CFA

    Chief Equity Investment Officer

    Eaton Vance

    Aaron Dunn, CFA

    Equity Analyst

    Eaton Vance

    New supply from OPEC may be limited, which is supportive for oil prices over the next two to three years.

    Latest advisory blog entry

    March 7, 2016 | 4:30 PM

    The jobs engine keeps on chugging

    While the markets have had a bumpy start to the year, there remain no signs of a slowdown in the U.S. jobs engine. February was another month of extraordinary gains in the labor market, as the U.S. economy added 242,000 jobs. This was the third consecutive strong payroll report since the Fed hiked rates last December, with the U.S. economy averaging 228,000 jobs added per month over this period. Some highlights of the report:

    • In addition to the strong headline number, the Fed will be encouraged by the increase in the labor participation rate for the third straight month, showing that some of the potential workers on the sidelines are returning to the labor force.
    • The much choppier household employment survey showed 530,000 jobs added in February. This number has averaged 543,000 jobs added per month over the past quarter.
    • Despite the increase in the household employment survey, the unemployment rate held steady at 4.9%, due to a 555,000 increase in the number of people in the labor force.
    • While the unemployment rate remained unchanged, the underemployment rate fell from 9.9% to 9.7%, a new cycle low and a further sign that slack is being removed from the labor market.
    • The health care industry continued to be the biggest driver of job growth, adding 57,000 jobs in February. The retail trade sector also showed continued strength, adding 55,000 jobs in February. In addition, bars and restaurants added 40,000 jobs in February, a sign that the U.S. consumer remains strong. (It’s important to remember that small and medium-sized businesses drive job growth, most of which aren’t impacted by short-term market volatility because they’re not publicly traded.)
    • The economic bears will likely point to the weakness in average hourly earnings, which fell 0.1% month over month; however, the decline is due to a temporary quirk in the monthly calculation and is likely to reverse next month.

    All things considered, the strong payroll number should quiet some of the talk about the U.S. economy being close to another recession. While negativity in the media may be sexier television, a recession is not imminent; neither are Fed rate “cuts” or $10 oil. The U.S. economy may not be flourishing, but it remains a fairly healthy economy, with growth hovering around 2%.

    Bottom line for the Fed: With the Fed still a bit scarred from the market volatility seen in the first six weeks of the year, this strong payroll number is “too little too late” for the Fed to put a March rate hike back on the table. What this report might do is alter the language of the Fed’s next statement to a more hawkish tone, to try to get the market back on board with further rate hikes later this year. As of now, the market isn’t pricing in a full rate hike until early 2017.

    Andrew Szczurowski, CFA

    Portfolio Manager, Global Income Group

    Eaton Vance

    While negativity in the media may be sexier television, a recession is not imminent; neither are Fed rate “cuts” or $10 oil.

    Latest advisory blog entry

    March 7, 2016 | 11:30 AM

    5 tax-smart techniques for equity investors

    No one aims to leave money on the table. But thanks to capital gains taxes, that is exactly what investors do each year. In 2014, mutual funds paid nearly $398 billion in capital gains, according to Investment Company Institute (ICI), which was one of the biggest tax bites ever. With the S&P 500 Index setting new records last year, capital gains for 2015 were likely even higher.

    Even though nearly every investor pays taxes, when asked to identify the biggest risks to their long-term goals, many investors tend to underestimate — or overlook entirely — the impact of taxes. Despite the significant bite taxes can take out of an investor’s real rate of return, many people simply don’t consider taxes when considering investment returns. A tax-managed equity strategy may employ a number of techniques to help ease investors’ tax burden, including taking steps to minimize capital gains and avoiding fully taxable dividend income.

    While higher taxes may be particularly painful for high-income earners, the reality is, the tax increases have a much broader effect due to the increase in capital gains. Many investors – particularly those in the highest tax brackets – want both growth and tax efficiency. This is where tax-managed equity funds may help.

    A combination of helpful tax management techniques used by tax-managed equity funds may help investors reduce the tax burden and protect their wealth. These techniques include:

    • Buy and hold: Using a long-term perspective when investing can delay capital gains recognition, as long-term gains are taxed at a lower rate than short-term gains.
    • Tax-loss harvesting: Using tax-loss turnover in a disciplined fashion to harvest losses can help offset gains taken elsewhere in the portfolio.
    • QDI: Under the American Tax Relief Act of 2012, qualified dividend income (QDI) is taxed at the lower long-term capital gains rates.
    • Tax lot selling: By selling shares with the highest basis first, investors may minimize capital gains.
    • Buy and hedge: Funds may also use tax-advantaged hedging techniques as alternatives to taxable sales in order to manage gains and losses, potentially maximizing after-tax returns.

    Bottom line: It is critical that investors understand the potential impact of capital gains and taxes on their portfolios. Appropriate strategies to help mitigate the tax drag should be explored. Investors should consult their financial and tax advisors for more information. By pursuing a sound, tax-aware investment approach, investors may be able to optimize the likelihood of reaching their long-term goals.




    Eaton Vance does not provide tax or legal advice. Prospective investors should consult with a tax or legal advisor before making any investment decision.

    The success of any investment program depends on portfolio management's successful application of analytical skills and investment judgment. Active management involves subjective decisions.

    Fund performance is sensitive to stock market volatility. Market conditions may limit the ability to generate tax losses or to generate dividend income taxed at favorable tax rates. The Fund's ability to utilize various tax-managed techniques may be curtailed or eliminated in the future by tax legislation or regulation.

    Michael Allison, CFA

    Equity Portfolio Manager

    Eaton Vance

    It is critical that investors understand the potential impact of capital gains and taxes on their portfolios.

    Latest advisory blog entry

    March 4, 2016 | 9:30 AM

    The world's other most important central bank

    There is great debate about the direction of Fed policy this year, with some expecting further Fed tightening and others expecting a rate cut after the December 2015 rate hike. On the other hand, there is no debate about the direction of Chinese monetary policy, but the methods and timing of the easing are still very much in the air.

    The People’s Bank of China (PBOC) cut its reserve requirement ratio (RRR) on Monday from 17.50% to 17%. While this 50 basis point move doesn’t seem like a big deal on a stand-alone basis, we think it is a very important signal from the PBOC that it is willing to ease monetary policy despite the continued capital outflows and pressure on the currency. We think this is the beginning of a long easing cycle that will see more RRR cuts, falling onshore interbank rates and a weaker currency.

    Over the past year, China has seen enormous amounts of capital outflow, which has led to reserves declining from $3.81 trillion to $3.23 trillion at the end of January. The outflow has come from a variety of sources (corporates, individuals, foreign companies) and for a variety of reasons (hedging foreign liabilities, asset diversification, foreign direct investment outflows). More interestingly, it appears most of the flow has gone through the current account in the form of overinvoicing (overpaying for imported goods to be able to get more money out of the country) rather than direct financial transactions in the capital account. The combination of sources, motivations and path of the flows suggests that it will be very hard for Chinese policymakers to stem this outflow by simply closing loopholes in the capital account or trying to punish “speculators.” These are all real outflows that are unlikely to abate in the current environment.

    In the face of these outflows, policymakers have resorted to a mishmash of measures. They initially devalued/depegged/depreciated (we argue internally the best term for the move) the yuan (CNY) on August 11, 2015, and then proceeded to allow depreciation in fits and starts over the subsequent six months. Since the beginning of 2015, the currency has depreciated over 5% against the U.S. dollar, but has appreciated over 5% on a real effective exchange rate basis – the currency has barely moved due to heavy intervention by the PBOC. This intervention has sucked an enormous amount of liquidity out of the domestic system and has not allowed the PBOC to forcefully ease. However, as the currency has stabilized over the past month or so, the recent easing by the PBOC may be the sign of things to come; we think China wants to continue with an aggressive monetary easing cycle, but wants to manage this cycle carefully, as it doesn’t want to exacerbate the market forces for CNY depreciation.

    Bottom line: The impossible trinity of an open capital account (not fully open in China’s case, but definitely not closing), pegged currency and control over domestic interest rates definitely holds for China and Monday’s RRR cut shows that policymakers are finally willing to put a great emphasis on reducing interest rates. While we doubt that Chinese policymakers are ready to fully let go of any parts of the trinity, we think they will be forced to “sacrifice” full control of the currency in order to continue with a monetary easing cycle.

    Eric Stein, CFA

    Co-Director of Global Income

    Eaton Vance

    The recent easing by the PBOC may be the sign of things to come.

    Latest advisory blog entry

    March 3, 2016 | 2:30 PM

    Is inflation heating up?

    The month-over-month headline number for the consumer price index (CPI) was unchanged at 0% in January, but the details of the release and the year-over-year (YOY) trends suggest to us that the inflection point in inflation is in the rearview mirror.

    Indeed, sharp declines in the energy markets continue to mask persistent strength in services and non-energy related inflation. Energy fell 2.8% month over month (MOM) and gasoline fell 4.8% MOM, as energy prices declines passed through to the consumer. However, we continue to view the weakness in energy as transitory.

    On the other hand, core inflation (which excludes food and energy) posted a 0.3% MOM gain. This is the highest single month print since August 2011, and only the fourth time in the last eight years that the core number has experienced this large an increase. In fact, every CPI sector not associated with energy increased in January. It is clear that the upward trend is broadening, as prices for items as diverse as airline fares and apparel are rising.

    More broadly, the exceptionally weak energy prints of last year are being replaced by higher or less negative prints, pushing the YOY rate higher. On a YOY basis, the headline CPI is rising at 1.4% and core inflation is rising at 2.2%. Services inflation has increased 3% YOY while energy inflation has fallen 6.5% YOY. Importantly, core services CPI at 3% is a new cycle high.

    We have seen recent headlines argue that the PCE (personal consumption expenditures) data are more reliable as an inflation signal, as the Federal Reserve prefers to use this measure. However, we note that the PCE inflation data have a heavier weighting in health care, where price increase have been held lower by changes in Medicare and Medicaid. On the other hand, core CPI has seen three consecutive months at or above 2%.

    Bottom line: We think the best news on inflation is behind us. Core inflation YOY is turning higher across developed markets, wages are turning higher, and we believe that most of the energy and metals price declines have already occurred. As such, we continue to view inflation assets as historically cheap and cheaper than the fundamentals of inflation suggest they should be.




    An imbalance in supply and demand in the income market may result in valuation uncertainties and greater volatility, less liquidity, widening credit spreads and a lack of price transparency in the market. Interest payments on inflation-linked securities may vary widely and will fluctuate as principal and interest are adjusted for inflation. Investments in inflation-linked securities may lose value in the event that the actual rate of inflation is different than the rate of the inflation index.

    Stewart Taylor

    Diversified Fixed Income Portfolio Manager

    Eaton Vance

    We think the best news on inflation is behind us.

    Latest advisory blog entry

    March 2, 2016 | 9:30 AM

    Why Chicago is not the next Detroit

    FIRST IN A SERIES

    Since its debt was downgraded a year ago, Chicago has drawn many comparisons to Detroit, which was the last major U.S. city to declare bankruptcy. To be sure, shoring up a fiscal situation as precarious as Chicago’s is no easy task. While long-term issues will remain a challenge, Chicago has begun to show it does have the financial wherewithal to address its fiscal challenges. This differs significantly from Detroit, which filed for bankruptcy on July 18, 2013. However, over the longer term, it will take significant additional political will to fully address Chicago’s historical liabilities.

    Below, we offer a view on how vastly different the situations and trends are for Chicago now compared with Detroit when it filed for bankruptcy.

    Bottom line: As the third-largest city in the U.S., Chicago has a dynamic economy that produced $590 billion in gross regional product in 2013. While long-term issues will remain a challenge, recent property tax increases are a significant first step in addressing the city’s tremendous underfunded historical liabilities.

    In the coming days, we will dive deeper into Chicago’s current situation with posts that examine what investors should consider when looking at Chicago’s debt, including the long-term funding projections of the city’s pension plans, as well as the relative value of Chicago’s debt.




    An imbalance in supply and demand in the income market may result in valuation uncertainties and greater volatility, less liquidity, widening credit spreads and a lack of price transparency in the market. As interest rates rise, the value of certain income investments is likely to decline. Investments in income securities may be affected by changes in the creditworthiness of the issuer and are subject to the risk of nonpayment of principal and interest.

    William Delahunty, CFA

    Director of Municipal Research

    Eaton Vance

    Chicago has begun to show it does have the financial wherewithal to address its fiscal challenges.

    Latest advisory blog entry

    March 2, 2016 | 1:30 PM

    Trump’s ascendancy explained

    Like other pundits, we thought Donald Trump could not win the Republican nomination for president. But, we also have said for many months that if Trump is still going strong on March 1 (Super Tuesday), then the calculus will be much different. We are now at that juncture, and it indeed appears it will be difficult to derail Trump’s quest.

    To predict how Trump is likely to fare in the general election (assuming he does, in fact, win the nomination), it is important first to understand the source of his appeal. The bulk of Trump’s supporters are white men (and some white women) who feel abandoned by the economic recovery and the political establishment. They feel under siege, both economically and culturally.

    Trump’s incendiary language and nationalistic campaign speak to these disgruntled voters. His supporters believe they finally have found someone tough enough to push back against the forces that have hurt them. They love Trump’s confidence and his simple, intuitive answers to issues – answers that contrast favorably with the nuanced positions that make other candidates appear wishy-washy and incapable of action. They love that Trump refuses to apologize for statements others find offensive – his supporters disdain political correctness as pandering to the very people who threaten their way of life.

    Trump’s supporters further believe conventional politicians have done nothing to reverse their plight. Democrats have fostered programs that help the very people who imperil them. Despite repeated campaign promises, Republicans have done nothing to thwart the Democrats’ objectives; instead they have, in the words of supporters, let the Obama administration run roughshod over them.

    This reaction explains why Trump continues to thrive in the face of withering attacks. When challenged that his ideas are unconstitutional, illegal or prohibitively expensive, Trump simply pivots to a personal attack on the objector – usually a conventional politician or a member of the media. Because the criticisms come from people Trump’s supporters don’t like or trust, the barbs only confirm supporters’ views that Trump is the only one with the ideas and the guts to take on the political establishment. Thus, in a perverse manner, criticism lends credence to Trump’s positions and his popularity grows. Unless these opponents find a criticism that sticks, it will be difficult to stop Trump before the convention.

    Bottom line: Trump’s candidacy is likely to energize a large portion of Republican voters in the general election. Uncertain is the extent to which his candidacy also energizes the forces against him and, more broadly, whether his rhetoric can capture a large portion of the 42% of voters who are Independents.

    If Trump, in fact, locks up the nomination, we will consider Trump’s prospects in the general election in an upcoming paper.




    Andrew H. Friedman is the principal of The Washington Update LLC and a former senior partner in a Washington, D.C. law firm. He and his colleague Jeff Bush speak regularly on legislative and regulatory developments and trends affecting investment, insurance and retirement products. They may be reached at www.TheWashingtonUpdate.com.

    Andrew Friedman

    Principal

    The Washington Update

    Trump’s candidacy is likely to energize a large portion of Republican voters in the general election.

    Latest advisory blog entry

    March 1, 2016 | 10:30 AM

    What’s overlooked in today’s volatile markets?

    For years, financial market volatility was suppressed in part by multiple rounds of the Federal Reserve’s quantitative easing (QE) programs. In 2016, it has re-emerged with a vengeance. We think that one of the best ways long-term investors can dampen volatility in their portfolios while staying fully invested is through proper diversification. That is, selecting asset classes whose prices move fairly independent of one another, like domestic stocks and investment-grade (IG) bonds. A balanced approach using a simple 60/40 moderate allocation strategy can potentially be one effective way to navigate volatile markets.

    Lately, it seems as though half of market participants are concerned about rising interest rates and the other half about the U.S. economy entering a recession. News headlines recently have focused on the slide in equities and high-yield bond prices, yet little attention has been paid to the recent steady performance and yield of IG corporate bonds. So it is not surprising that many have overlooked IG bonds (and IG corporates, in particular) as a way to provide ballast in their portfolio.

    Investors may question why IG corporate bonds warrant attention given their exposure to both interest rates and credit risk. Although stocks have fallen about 5% on a year-to-date basis after being down as much as 10% in 2016, we think it’s important for investors to focus on the following aspects about the IG market:

    • Yield is unchanged: IG corporate bonds currently yield 3.6%, exactly where they started the year.
    • Positive return: As of February 24, the IG corporate bond market has returned 0.8%, while the broader domestic IG market has generated a 2.0% return.

    Furthermore, corporate bonds now yield 2.0% more than U.S. Treasury notes, double the spread* from their mid-2014 lows. We think this valuation makes the corporate sector attractive even considering the rising risk of a recession. We remain constructive on the U.S. economy in 2016 and anticipate modest GDP growth given the momentum in employment and residential real estate.

    Bottom line: In this environment, the IG corporate bond market may continue to generate steady returns as changes in interest rates are largely offset by movements in credit spreads. By using a straightforward balanced approach that incorporates IG bonds and domestic stocks, investors can potentially take advantage of these asset classes to navigate volatility.




    *Spread is the difference between the yield of a security and a comparable duration U.S. Treasury.

    Source: Bloomberg as of 2/26/2016.

    Past performance is no guarantee of future results.

    Diversification does not guarantee profit or eliminate the risk of loss.

    An imbalance in supply and demand in the income market may result in valuation uncertainties and greater volatility, less liquidity, widening credit spreads and a lack of price transparency in the market. As interest rates rise, the value of certain income investments is likely to decline. Investments in income securities may be affected by changes in the creditworthiness of the issuer and are subject to the risk of nonpayment of principal and interest.

    Bernie Scozzafava

    Diversified Fixed Income Portfolio Manager

    Eaton Vance

    We think this valuation makes the corporate sector attractive even considering the rising risk of a recession.

    Latest advisory blog entry

    March 1, 2016 | 10:00 AM

    What makes a market?

    What makes a market? The answer is two different views around the same company, country and macro issue, plus trades at prices that fulfill each side’s objective. In other words: buyers and sellers. Small differences in views allow trades to happen frequently.

    Where there is less friction, dispersion and uncertainty surrounding the views, we have periods of complacency – and less volatility. Right now, the difference in views has reached extreme positioning. There is a wide gap between buyers and sellers, and we now find ourselves in a new period of higher – but not unexpected – volatility.

    Five hot topics for the market right now could make the difference between a good year and a not-so-good year, and these five represent the widest gap between the views of buyers and sellers. Because the outcomes are so different and there is data available at any given time that supports both sides, we have seen greater volatility as the market vacillates from one side to another. Is anyone seasick yet?

    Oil is the one battleground receiving the most attention right now. In our view, oil prices appear to have found a floor. But, we note that a lot of cheap energy or commodity-sensitive companies have been trading at distressed levels (in the 50s or below). The market may be correct that these will not stay investment grade, but it does not mean they will need to be restructured or file for bankruptcy. They simply don’t have anyone who wants to buy them.

    Bottom line: At some point, one of the sides will be proven right. Higher volatility is an opportunity to demonstrate skill. For now, it’s about finding the opportunity at the right price. It’s less about right and wrong and more about what we know than what we don’t know.

    Kathleen Gaffney, CFA

    Co-Director of Diversified Fixed Income

    Eaton Vance

    At some point, one of the sides will be proven right.

    Latest advisory blog entry

    February 26, 2016 | 3:00 PM

    Why managed municipals matter

    We believe 2016 will be a pivotal year for the “unmanaged to managed” theme in the municipal bond market. While this trend is already underway, existing challenges and new developments may make 2016 the year when a major shift takes place.

    One of the key developments involves mark-up disclosures that may be in the offing. Considering the implications these changes could have, we think they are being overlooked by many municipal bond investors.

    The Municipal Securities Rulemaking Board (MSRB) and the Securities and Exchange Commission (SEC) are pushing for more transparency into the transaction costs paid by retail municipal bond investors – buyers who make up 42% of the market.

    According to a study performed by the Securities Litigation and Consulting Group, it is estimated that customers paid more than $10 billion in excessive markups and markdowns on municipals between 2005 and 2013. At the moment, investors may not be fully aware of these costs. That could change in 2016.

    Bottom line: We believe that a rule requiring brokers to disclose profits on trade confirmations could cause a massive shift away from the traditional transaction-based model. We think that investors and their advisors may want to consider partnering with a professional muni manager ahead of this likely change.




    The success of any investment program depends on portfolio management's successful application of analytical skills and investment judgment. Active management involves subjective decisions.

    Jon Rocafort

    Co-Director of SMA Strategies, Tax-Advantaged Bond Strategies

    Eaton Vance

    A rule requiring brokers to disclose profits on trade confirmations could cause a massive shift away from the traditional transaction-based model.

    Latest advisory blog entry

    February 25, 2016 | 10:15 AM

    Opportunity knocks loudly for loans

    For bond investors interested in potential bargains, there’s a good case to be made these days for floating-rate loans. A few simple bond math steps can clarify just how far the market may be overreacting in pushing down loan prices, and how big the potential bargain might be.

    We start with the January 31, 2016 price of 90.2 on the S&P/LSTA Leveraged Loan Index*. Note that loans today still hover around that same level. Recall that loans are par instruments – absent credit losses, that price implies that investors pick up another 9.8 points as bonds accrue to par (generally over three years, based on the long-term average life of loans). To estimate credit losses – and what an investor’s yield to maturity** will be – assumptions must be made about default levels and the amount lenders will recover in those defaults.

    Fortunately, loans have a long track record to help in this calculation, as illustrated in the hypothetical chart below. For example, the 7.7% yield-to-maturity of the bar at the far left assumes default rates stay at the current level of 1.5%, and recoveries amount to 70% – a long-term average aided by the fact that loans are senior and secured in the issuer’s capital structure. If default rates creep up to their 15-year average of 3.2% (next bar to the right), loans still yield 7.2% to maturity.

    At the far right, the chart gives insight into what the 90.2 market price says about default expectations. For simplicity, rounding the price to 90 gives a 10% default rate expectation – a figure that is annual, over three years. Cumulatively, it is a prediction of defaults of almost 30% in three years. For perspective, at the height of the financial crisis the default rate remained over 8% for less than 12 months. We believe that the odds of defaults reaching 10% per year are exceedingly slim, but even in this scenario, the yield would still be 5.2% to maturity. It appears the end of days may indeed be “priced in.”

    We believe that taken a whole, loan issuers are fundamentally sound as the market advances into this protracted recovery from the Great Recession. According to S&P Capital IQ statistics, corporate cash flows are still growing, albeit at a slower rate than a few years ago. Leverage is on par with historical averages, while interest coverage is 40% higher than historical average. We indeed anticipate a modest increase in default rates, but as we have shown, we believe that poses little threat to potential returns ahead, given the substantial buffer provided by today’s pricing structure.

    Bottom line: In Eaton Vance’s experience, rarely has the discrepancy between fundamental value and real-world market prices been this big. Opportunity knocks – loudly.




    *The S&P/LSTA U.S. Leveraged Loan Index is designed to reflect the performance of the largest facilities in the leveraged loan market.

    **Yield to maturity is the total return anticipated on a bond if it is held until the end of its lifetime, expressed as an annual rate.

    An imbalance in supply and demand in the income market may result in valuation uncertainties and greater volatility, less liquidity, widening credit spreads and a lack of price transparency in the market. Bank loans are subject to prepayment risk. Purchases and sales of bank loans in the secondary market generally are subject to contractual restrictions and may be subject to extended settlement periods.

    Scott Page, CFA

    Co-Director of Bank Loans

    Eaton Vance

    Craig Russ

    Co-Director of Bank Loans

    Eaton Vance

    A few simple bond math steps can clarify just how far the market may be overreacting in pushing down loan prices.

    Latest advisory blog entry

    February 24, 2016 | 12:45 PM

    Location, location, location

    There is an old saying that successful real estate investors follow three important considerations: location, location, location. The same can be true of equity investing during the past several years. When the global economy was binging on credit, it was fine to invest in marginal locations’ equity markets. However, as the global economy slowed, those fringe markets have disappointed, and “location, location, location” has proved as important to equity performance as it is in real estate.

    The equity world’s equivalent of A+ office space is the U.S. consumer sector. It’s not an accident that consumer discretionary stocks were 2015’s best-performing sector in the U.S. because the U.S. consumer has been the strongest and most stable part of the global economy, benefiting from what we have called the “Wal-Mart World.” The entire world is offering consumers lower and lower prices, and excess global capacity is putting pressure on product prices as countries compete for market share within the stable and healthy U.S. consumer market.

    The emerging-market consumer has been one of the most discussed growth stories of the past decade. Investors believe that U.S. consumers are sated and overleveraged, but emerging-market consumers provide great growth opportunities because of their high savings rates and growing incomes. Unfortunately, sector performance has reflected the exact opposite, and U.S. consumer stocks have outperformed emerging-market consumer stocks by more than 1800 basis points per year over the last five years (as the chart below shows).

    This is understandable when one looks at the secular depreciation of emerging-market currencies. Because currency strength or weakness measures purchasing power, a country’s standard of living improves as its currency appreciates and deteriorates as its currency depreciates. Accordingly, when the U.S. dollar was depreciating, some observers pointed out that the U.S. standard of living was weakening.

    It is curious that investors were pessimistic regarding the outlook for U.S. consumers when the U.S. dollar was falling, but have remained bullish on the prospects for emerging-market consumers despite the precipitous fall in emerging market currencies.

    Bottom line: It’s fine to invest in fringe markets when the world is binging on credit, but investors need to be more circumspect when the global economy slows. Economic cyclicals tend to outperform when the economic cycle revs up, but underperform when the economic cycle slows. Credit cyclicals outperform when the credit cycle revs up, but underperform when the credit cycle slows. Unfortunately, fringe markets are significantly exposed to both cycles.

    Richard Bernstein

    CEO and CIO

    Richard Bernstein Advisors, LLC

    U.S. consumer stocks have outperformed emerging-market consumer stocks by more than 1800 basis points per year over the last five years.

    Latest advisory blog entry

    February 24, 2016 | 10:45 AM

    Volatility continues to be top of mind

    Managing volatility continues to be by far the top concern for financial advisors and their clients, according to the latest Eaton Vance Advisor Top-of-Mind Index (ATOMIX), our quarterly survey of 1,000 financial advisors.

    What is the source of volatility fears? According to our latest ATOMIX survey, the biggest sources of market volatility in 2016 include:

    • Geopolitical issues (28%)
    • Stalled U.S. economic growth (23%)
    • Turbulence in the Chinese economy (22%)
    • The Federal Reserve’s moves on interest rates (20%)
    • Instability in the European Union (7%)

    Importantly, it’s unlikely that volatility fades fast considering several of the above mentioned macro issues will not be remedied in the short-term. While it may be impossible to solve for all of these challenges, investors do have several ways to address volatility concerns in their portfolios. We believe, however, that one of the most effective ways to navigate volatile markets is through a balanced approach using a simple 60/40 moderate allocation strategy.

    A balanced approach may offer a smoother ride. Although past performance is no guarantee of future results, the chart below shows that balanced funds have consistently fallen in the middle of the pack, while other asset groups (notably emerging markets, commodities and Treasurys) have shown a greater fluctuation in leadership.

    Bottom Line: In times of volatility, it’s good to look to investment approaches that have been able to deliver consistent short- and long-term returns. We believe that a straight-forward balanced approach may provide investors with stronger risk-adjusted returns than many newer approaches to long-term investing.




    Dow Jones U.S. Select Real Estate Securities Index is an unmanaged index of publicly traded real estate securities. Morgan Stanley Capital International (MSCI) Emerging Markets Index is an unmanaged index of emerging markets common stocks. Morgan Stanley Capital International (MSCI) EAFE Index is an unmanaged index of equities in the developed markets, excluding the U.S. and Canada. Credit Suisse Hedge Fund Index is an asset-weighted hedge fund index and includes only funds, as opposed to separate accounts. Bloomberg Commodity Index is a broadly diversified index tracking futures contracts on physical commodities. Barclays U.S. Aggregate Index is an unmanaged index that tracks domestic investment-grade bonds, including corporate, government, and mortgage-backed securities. Barclays U.S. Treasury Index measures public debt instruments issued by the U.S. Treasury. Barclays Global Aggregate Ex-USD Index is a broad-based measure of global Investment Grade fixed-rate debt investments, excluding USD-denominated debt. Morningstar™ Moderate Allocation Category includes funds that seek to provide capital appreciation and income by investing in stocks, bonds, and cash with the equity weight typically between 50-70% and the remainder in fixed income and cash. S&P 500 Index is an unmanaged index of large-cap stocks commonly used as a measure of U.S. stock market performance.

    Past performance is no guarantee of future results. Historical performance of the index illustrates market trends and does not represent the past or future performance. Unless otherwise stated, index returns do not reflect the effect of any applicable sales charges, commissions, expenses, taxes or leverage, as applicable. It is not possible to invest directly in an index.

    Charles Gaffney

    Equity Portfolio Manager

    Eaton Vance

    Investors do have several ways to address volatility concerns in their portfolios.

    Latest advisory blog entry

    February 22, 2016 | 12:00 PM

    The sweet spot for dividends

    Don’t settle for second – embrace it. In a low-yield environment, the temptation may be to reach for the highest-yielding dividend names. Since the 1940s, strategies emphasizing high-dividend-paying stocks have outperformed strategies emphasizing low-paying stocks. However, this outperformance has not come from chasing the highest-yielding stocks.

    Over the course of time, we have noted the outperformance of the second-highest quintile dividend payers of the S&P 500 Index. Essentially, we rank dividend-paying members of the S&P 500 Index by dividend yield. The first quintile includes the highest-paying stocks, but we have found that historically these are the weakest companies with an inability to sustain their dividend payments.

    We view the second-quintile group as the “sweet spot.” This group has outperformed the market by a wide margin, with a cumulative return significantly higher than that of other dividend yield quintiles in the S&P 500 Index over the last 25 years, as the chart below illustrates.

    By targeting this second-quintile group, we tend to find companies that we believe are of high quality with attractive valuations. Additionally, these companies have tended to show the ability to sustain and grow their dividends over time.

    Bottom line: Dividend income is an important component of total return for equity securities. Beyond this contribution, dividend-paying stocks may provide investors with attractive income relative to other sources of yield.




    Past performance is no guarantee of future results.

    Investment performance is sensitive to stock market volatility. Changes in the dividend policies of companies could make it difficult to provide a predictable level of income.

    Michael Allison, CFA

    Equity Portfolio Manager

    Eaton Vance

    By targeting this second-quintile group, we tend to find companies that we believe are of high quality with attractive valuations.

    Latest advisory blog entry

    February 19, 2016 | 10:00 AM

    Muni market outlook: Spreads and valuations

    FIFTH IN A SERIES

    Last week, our municipal bond group offered our 2016 outlook on interest rates, the muni yield curve* and the challenges presented by Puerto Rico. To conclude our 2016 municipal bond market outlook series, we want to focus on municipal bond credit spreads** and valuations.

    Thanks to an improving U.S. economy, the credit outlook for the majority of muni issuers is positive. Historically, muni credit has generally improved as the economy has strengthened. We think muni issuers’ strong credit quality reflects their resiliency in the midst of broader economic themes, which may be a negative for certain other asset classes (e.g., the impact of oil price declines on high-yield debt and equity prices).

    The positive U.S. economic environment has contributed to a current muni default rate of 0.4%, according to Municipal Market Advisors (MMA). We note that in 2015, unique municipal defaults fell for the fifth straight year, while corporate issuer defaults climbed to the highest level since 2009, also per MMA. That said, credit spreads in the muni market are tight, as the chart below shows. So while credit is generally improving, the muni space requires careful navigation.

    What about valuations? After back-to-back years of relative outperformance, AAA-rated municipal-to-Treasury ratios have dropped to levels that indicate muni bonds are not as cheap as they were to begin 2015. Similar to our view on tight credit spreads, we think that lower muni-to-Treasury yield ratios highlight the need for active management in 2016.

    Additionally, we think muni-to-Treasury ratios may still have to adjust to a new world of higher tax rates. With higher tax rates on investment income, we think that the muni-to-Treasury ratio would have to be lower than a range of 85% to 90% in order for 30-year munis to be considered rich.

    Bottom line: With overall credit conditions improving as well as narrow credit spreads, we believe active management can add value and help individual investors navigate the market. A flexible approach to muni bonds can help search for opportunities such as taxable muni bonds, insured bonds with distressed underlying credits, hospital bonds and municipal floating-rate notes. Should volatility increase as we expect, an experienced, skilled investment manager can help navigate the muni market.




    *Yield curve is a graphical representation of the yields offered by bonds of various maturities. The yield curve flattens when long-term rates fall and/or short-term rates increase, and the yield curve steepens when long-term rates increase and/or short-term rates fall.

    **Spread is the difference between the yield of a security and a comparable duration U.S. Treasury.

    The success of any investment program depends on portfolio management's successful application of analytical skills and investment judgment. Active management involves subjective decisions.

    An imbalance in supply and demand in the municipal market may result in valuation uncertainties and greater volatility, less liquidity, widening credit spreads and a lack of price transparency in the market. There generally is limited public information about municipal issuers. As interest rates rise, the value of certain income investments is likely to decline. Longer-term bonds typically are more sensitive to interest-rate changes than shorter-term bonds.

    Adam Weigold, CFA

    Senior Municipal Portfolio Manager

    Eaton Vance

    We believe active management can add value and help individual investors navigate the market.

    Latest advisory blog entry

    February 19, 2016 | 3:00 PM

    With experience comes wisdom

    With Tax Day approaching, many investors are seeing the effect capital gains taxes have on their earnings. Realized capital losses are valuable because they can be used to offset capital gains, thereby reducing an investor’s overall tax bill. Many may wish that they had taken advantage of short-term losses available during the past year, to help to reduce their current bill for gains that were realized in their accounts.

    While it is too late to go back now, investors can do better starting now, and use the volatility already seen in the markets this year to harvest losses, and take an active after-tax perspective with their portfolios.

    There are several reasons why it is advantageous to capture losses all year and not wait until November or December:

    • The tax lots that are sold at a loss can help to produce excess realized losses. Those excess losses realized in the portfolio can also be used to offset gains that exist elsewhere in the investor’s overall portfolio.
    • Taxable gains may be generated from the investor’s active manager investments, from the sale of real estate, or from selling concentrated stock positions.
    • It is important to regularly monitor portfolios for harvestable losses. This helps ensure that tax-management opportunities are fully captured and banked as they become available, rather than risking that they dissipate before the end of the year.

    On the downside, some investors who wait to harvest all the losses they can at the end of the year risk not being fully diversified or invested, or are forced to park their cash in an ETF while they wait 31 days to avoid violating wash sales on the equity names they sold.

    Bottom line: Research and experience show how loss harvesting within a separately managed account (SMA) potentially adds up to 2% of after-tax value annually, which is something I wrote about in December. Investors who want to be tax sensitive all year long may want to consider implementing their market index exposure through a tax-managed SMA.

    Rey Santodomingo, CFA

    Director of Investment Strategy-Tax Managed Equities

    Parametric

    It is important to regularly monitor portfolios for harvestable losses.

    Latest advisory blog entry

    February 18, 2016 | 1:30 PM

    3 signs of a healthier oil market

    The decline in oil prices over the past year has been a painful process for those watching that market. However, we’re starting to see some signals that point to a bottom in oil prices. Three recent events, while not game changers on their own, are coming together to create a mosaic that indicates a healthier oil market:

    1. U.S. supply has peaked and is coming down.
    2. Several OPEC members have agreed to halt production.
    3. A breakdown in the dollar relationship.

    The first point is self-explanatory: U.S. supply has been robust, but is falling nonetheless. Capital spending (capex) and rig counts for future production have dropped, even though current U.S. production has been resilient. That U.S. oil companies are producing “more with less” is not sustainable indefinitely.

    This past weekend, Saudi and Russia led a group that agreed to halt production growth, though Iran remains a holdout. A skeptic would point to the fact that OPEC is near to its production capacity already and compliance would be a real concern, but we think this is an important milestone from a signaling perspective. Fiscal budgets at oil producing nations do matter, after all.

    That said, OPEC’s agreement is also not a cure for the market’s ills; OPEC has shown repeatedly that quotas are to be treated more as “guidelines” than “rules,” to put it nicely. OPEC’s decision is important, but the reasoning behind not cutting is that Saudi Arabia’s goal of trimming global production is bearing fruit. Inventories remain stretched, but they will decline in time, too. We note that OPEC’s comments could be the start of a deeper rebalancing process, as it may be realizing that the fragmented U.S. shale sector does not respond like their national oil companies do with centralized oil ministers and federal budget pressures.

    The final point on a major break in correlations implies that the oil market is beginning to trade more on fundamentals than simply as an inverse function of the U.S. dollar. In the chart below, we show the rolling 60-day correlation of the U.S. Dollar Index (DXY) and West Texas Intermediate (WTI) crude oil against WTI crude prices. Since late 2014 when oil began to break down, the correlation between the pair has spent the bulk of the time soundly in negative territory with two notable exceptions. The first was September/October 2015, when the market “corrected” following the Chinese currency revaluation. The second is the most recent handful of months, which suggests to us that prices are trading at or near their lows and more on fundamentals than momentum.

    Bottom line: The commodities market is priced for severe recession and contraction in global demand, neither of which we expect. While substitution is plausible in the long term, it is not in anyone’s near-term forecast. It is impossible to call a bottom, but it appears to us that we may be in the process of forming one. Sentiment surrounding asset prices in select energy and commodities sectors is disconnected from a reasonable forecast for future supply and demand, and a long-term contrarian view can be rewarded.

    Henry Peabody, CFA

    Diversified Fixed Income Portfolio Manager

    Eaton Vance

    Recent events, while not game changers on their own, are coming together to create a mosaic that indicates a healthier oil market.

    Latest advisory blog entry

    February 17, 2016 | 11:00 AM

    The Scalia gamble

    The Republican Senate leadership has made clear the Senate will not consider an Obama nominee to replace Justice Scalia, but rather will wait for the new president to nominate a candidate after the election. This strategy could backfire.

    If the Senate would give his nominee due consideration, President Obama likely would nominate a candidate more palatable to the Republican majority. We understand that two of the leading candidates under consideration are U.S. Appeals Court judges who the Senate had confirmed unanimously.

    Many observers feel that the party that wins the White House also is likely to emerge with a majority in the Senate (the percent of Americans splitting their votes is at an all-time low). If the election yields not only a Democratic president but Democratic control of the Senate, then the new president – unencumbered by the need to sway as many Republican Senators – might well nominate someone much less accommodating of Republican views. The Republicans essentially will have written themselves out of the nominating process.

    Bottom line: Considering a qualified, more moderate nominee now might be the safer way to proceed.




    Andrew H. Friedman is the principal of The Washington Update LLC and a former senior partner in a Washington, D.C. law firm. He and his colleague Jeff Bush speak regularly on legislative and regulatory developments and trends affecting investment, insurance and retirement products. They may be reached at www.TheWashingtonUpdate.com.

    Andrew Friedman

    Principal

    The Washington Update

    Considering a qualified, more moderate nominee now might be the safer way to proceed.

    Latest advisory blog entry

    February 17, 2016 | 10:45 AM

    Negative rates in the US?

    Last week, Eric Stein shared his thoughts on negative rates being used by central bankers around the globe as a policy tool. Following up on his comments, we wanted to share some of our views on negative rates and the possibility the Fed uses this policy tool.

    The push to negative rates comes after years of at- or near-zero policy rates and massive quantitative easing (QE) failed to create the growth and inflation that policy makers had hoped for. Central banks are now left with an increasingly limited menu of alternatives to ease policy.

    Last month, the Bank of Japan (BOJ) announced a negative interest-rate policy (NIRP) after its economy weakened, despite an unprecedented amount of stimulus through QE. And last week, Fed President Janet Yellen in her testimony to Congress did not rule out the use of negative rates here. As Eric pointed out, central banks pursue NIRP to keep their currency from appreciating to the point that their exports become uncompetitive. Additionally, negative rates encourage savers and corporations to spend and invest in riskier assets.

    If the Fed wanted to put pressure on market rates and bring them negative, it could charge banks for holding their excess reserves (IOER). This would force banks to either find a new home for $3 trillion in cash currently on deposit or to pay the Fed to hold them. Part of the reason for the recent selloff in banks is fear that negative rates will hurt their margins. We wonder how many banks will choose simply to pay the assessment, viewing it as a cost of holding liquidity.

    Additionally the Fed could eliminate the reverse repo program (RRP). This would effectively eliminate the floor investment rate for money market funds. We think that the most likely recipient of the flows would be the front end of the U.S. Treasury curve.

    In early February, the Fed asked U.S. banks to consider the impact of negative rates by including a negative rate scenario into its 2016 stress test. While stressing that the scenario did not represent a forecast, it represents a sign of the times. Whether or not the Fed could actually issue U.S. Treasury’s at negative rates is something it would need to address, as it has not yet done so. However, the risk of dislocating money markets is one of the main reasons the Fed didn’t institute negative rates in the financial crisis of 2008.

    Bottom line: Will we see negative interest rates here in the U.S.? We have seen negative market rates before, albeit only in short U.S. Treasury Bills and not at issuance. However, it is important to remember that there is a difference between market rates and policy rates. While negative rates are not our base case, don’t be surprised to see them used as a policy tool should the U.S. economy weaken over the next few quarters.

    Stewart Taylor

    Diversified Fixed Income Portfolio Manager

    Eaton Vance

    Tim Robey

    Cash Management & Short Duration Portfolio Manager

    Eaton Vance

    Don’t be surprised to see them used as a policy tool should the U.S. economy weaken over the next few quarters.

    Latest advisory blog entry

    February 16, 2016 | 2:15 PM

    Too much fear in the market

    In listening to all of the market chatter on China this past month, I found myself channeling my inner Jan Brady. China, China, China!

    As the world’s second largest economy, China is clearly important to global growth. I continue to believe the Chinese equity market is irrelevant. It represents only 2% of world equity market capitalization, and is a somewhat artificial, emotional market that has had additional volatility introduced by ad hoc, seat-of-the-pants regulation.

    With China an insufficient explanation for market volatility, and little in the way of other new pieces of negative fundamental data, one is forced to look at sentiment for an explanation of the recent market downturn. My favorite two measures of equity market sentiment are the CBOE Volatility Index (VIX)* and the AAII Survey. The first chart below shows us the past year for the VIX.

    One of the popular talking points among market pundits in mid-January was: “We have not yet seen capitulation.” They pointed to the fact that the VIX had not spiked into the 40s, where it hit last August. Fine, so there is not panic selling. But, the AAII survey shows (below) the percentage of retail investors who are bullish on U.S. equities over the next six months dipping below 18%, the lowest reading since the 1980s, and a point lower than March 5, 2009, which occurred four days before the market bottomed during the financial crisis.

    Perhaps sentiment is best described as gloomy rather than panicked. The lack of incremental negative fundamental news combined with poor sentiment lead me to want to follow Warren Buffett’s advice and begin to be a little greedy. It is a basic tenet of investing that in order to outperform the market, you must do something different from the market.

    Bottom line: When fear levels are elevated, it generally pays to lean in, even if a bullish narrative is difficult to articulate. For long-term investors, having a steady program of dollar cost averaging** allows one to take advantage of pullbacks and avoid the temptation to try to call the near-term direction of the market.




    *THE CBOE Volatility Index (VIX) tracks the implied volatilities of a wide range of S&P 500 Index options.

    **Dollar-cost averaging does not guarantee profit or eliminate the risk of loss.

    Edward J. Perkin, CFA

    Chief Equity Investment Officer

    Eaton Vance

    One is forced to look at sentiment for an explanation of the recent market downturn.

    Latest advisory blog entry

    February 12, 2016 | 3:00 PM

    Puerto Rico’s impact on the muni market in 2016

    FOURTH IN A SERIES

    Continuing our outlook for the 2016 muni bond market, we think muni issuers’ strong credit quality reflects their resiliency in the midst of broader economic themes. On a year-over-year basis, state tax revenues have increased in 20 out of the last 22 quarters (according to the Rockefeller Institute) thanks to increases in sales and personal income taxes. Additionally, defaults in the muni bond space continue to decline.

    Puerto Rico, however, continues to cast a shadow over the muni bond market. It was reassuring to us that despite Puerto Rico debt issues, money flowed into the muni bond market in 2015. That said, we haven’t seen a default yet on Puerto Rico’s general obligation (GO) bonds. If a default on GO debt occurs, we do not know what impact that will have on the broader market.

    Puerto Rico’s fiscal situation continues to deteriorate, as revenue estimates for the fiscal year ending June 30, 2016, have been revised down (from $9.8 billion to $9.2 billion) and the Commonwealth’s cash flow forecast now shows that it is expected to end the fiscal year with negative $775 million in liquidity.

    Last week, Puerto Rico released a restructuring proposal to address its tax-supported debt. The goal of the proposal is to reduce the Commonwealth’s debt service to revenues to 15% from the current level of 36%. While the restructuring proposal was complex, the tax-supported debt would receive a 53% recovery of principal (GOs would receive a 72% recovery of principal, Cofina sales tax revenue bonds would receive a 49% recovery and other tax-supported debt would receive a 39% recovery).

    Importantly, Puerto Rico does not have access to Chapter 9 bankruptcy and, therefore, the restructuring plan is dependent on a very high percentage of bondholders voluntarily exchanging their current bonds for restructured bonds. We think it is highly unlikely that investors will exchange enough bonds for the plan to become effective. The Commonwealth has stated that if “a deal cannot be reached by May 1 … the Commonwealth may be forced to declare a debt moratorium.”

    As we look further out in 2016, key events for Puerto Rico include:

    • Finalizing a restructuring agreement between PREPA (Puerto Rico Electric Power Authority) and its creditors and bond insurers.
    • The federal government’s response to the crisis (potential Chapter 9 access or financial assistance).
    • Significant debt service payments of $400 million in May 2016 and $1.9 billion in July 2016.

    Bottom line: If a default by a Puerto Rico issuer disrupts the broader muni market, we would consider any price volatility as an opportunity.

    Our 2016 outlook blog series will conclude early next week with an examination of municipal bond credit spreads* and valuations.




    *Spread is the difference between the yield of a security and a comparable duration U.S. Treasury.

    An imbalance in supply and demand in the municipal market may result in valuation uncertainties and greater volatility, less liquidity, widening credit spreads and a lack of price transparency in the market. There generally is limited public information about municipal issuers. As interest rates rise, the value of certain income investments is likely to decline. Longer-term bonds typically are more sensitive to interest-rate changes than shorter-term bonds.

    William Delahunty, CFA

    Director of Municipal Research

    Eaton Vance

    Puerto Rico, however, continues to cast a shadow over the muni bond market.

    Latest advisory blog entry

    February 12, 2016 | 4:00 PM

    Central bankers losing their mojo

    While there have been many causes of the market volatility and risk aversion we have seen in 2016, over the past few weeks there has been a new concern for investors that seems to be leading to another leg down in most asset prices.

    Investors are beginning to realize that the best an aggressive central bank policy can hope for would be to move asset returns or economic growth forward to the present at the expense of growth and returns in the future. At some point, real underlying economic growth is needed to sustain and grow asset prices. In particular, investors doubt the relatively new tactic of using negative interest rates. They now fear the effect on assets, inflation and growth may have the opposite effect policymakers intend.

    While we have an intellectual bias against very activist central bank policies, there are environments of massively distressed asset prices and a true risk of significant recession turning into a depression. So the policy tools of zero interest rates and QE certainly have their place in a central bankers’ toolkit.

    However, the policy tool of negative nominal interest rates exists for only one purpose: to weaken your currency. There are certainly environments where a currency that’s too strong can be problematic for a country. But at some point, once major imbalances have adjusted, using negative rates to try to weaken a currency that should fundamentally strengthen is a very misguided policy that can lead to many negative consequences including issues in the banking sector, which can cause a lack of a credit creation – the exact thing central bankers are trying to spur. In addition, as one country goes to negative interest rates, others feel compelled to do the same; this can lead to a beggar-thy-neighbor currency policy. In the current environment, this is particularly harmful, as there has been a slowdown in global trade and the leading U.S. presidential candidates from both parties seem to be against free trade.

    Recent negative rate policy decisions have had the opposite reaction that policymakers were hoping for. Two weeks ago, the Bank of Japan, which had previously been very reluctant to go to negative rates, decided to cut its interest rates to a negative level. While there was a short-lived rally in Japanese equities and weakness in the Japanese yen, the stock market is now lower than it was before the announcement and the yen is stronger. Yesterday, the Riksbank (the central bank of Sweden) cut its interest rates from -35 basis points (bps) to -50bps. While the Swedish economy has been performing quite well and many market participants (including the Riksbank itself) think the Swedish krona should strengthen, this policy action was taken with the explicit reason to weaken the currency. While the currency weakened, that appears to have been a knee-jerk reaction, as it is now stronger than it was 24 hours ago before the announcement. We now appear to be in a world where central bankers are conducting potentially damaging economic policies that are not achieving the desired market impact.

    Bottom line: While it understandable the central bankers feel they are the “only game in town,” with political challenges in many countries making structural and fiscal policy more challenging to implement, they should remember the one of the first rules of central banking is to “do no harm.” These central bankers should understand the negative consequences of a continued race to further and further negative interest rates, particularly in economies where it is blatantly unnecessary.

    Eric Stein, CFA

    Co-Director of Global Income

    Eaton Vance

    Using negative rates to try to weaken a currency that should fundamentally strengthen is a very misguided policy.

    Latest advisory blog entry

    February 11, 2016 | 12:30 PM

    5 important points about CoCo securities

    Over the past several days, we have seen significant stress in the banking market in general and particularly in CoCos, or contingent convertible capital instruments. As these hybrid debt instruments are not widely understood and now are suddenly in the spotlight, we would like to share some points about how these securities work:

    • Investors in CoCo debt securities receive a coupon payment under normal circumstances. However, if an issuer is unable to make a coupon payment, the CoCo securities convert into equity or can be written down.
    • CoCos have been popular with European banks as a way to meet requirements for capital. These securities are considered Tier 1 capital; this means banks can use these bonds to improve their capital ratios without diluting existing equity holders.
    • Many investors seem to be generally aware that CoCos are written down/converted to equity if capital ratios fall below a certain trigger. However, the general market may be unaware that the risk of a write-down or conversion is not truly a major concern at present, as most banks have capital far above the trigger levels.
    • To us, the more salient issue is that the ability of CoCos to pay coupons can be limited based on certain other account measures. Banks, particularly those in Europe, have been restructuring (which entails significant costs) as well as incurring significant legal/regulatory costs. As a result, earnings have been low, or negative, despite the fact that on an operational basis they are generally profitable.
    • Unfortunately, CoCos are fairly complicated and there are several important financial metrics that must be met in order for the securities to perform as designed. One important metric that is most concerning now is not calculated in financial statements that adhere to generally accepted accounting principles (GAAP). These can only really be determined by examining a bank’s disclosure under available distributable items (ADI). Typically ADI is mostly retained earnings; however, there can be a slew of adjustments that impact the number.

    We think the broad market would take a missed payment extremely poorly, causing stocks to suffer and borrowing costs to spike. We also think regulators and politicians would like to avoid a meltdown of a market, especially with banks that have only been de-risking and raising capital in the years since the last financial crisis.

    Bottom line: It appears as though the equity market and maybe broader fixed-income market is just coming to understand some of these specifics, with some obvious panic. But from our point of view, we believe that management of any of the banks in question has a very strong desire to make CoCo payments.

    John Croft, CFA

    Diversified Fixed Income Portfolio Manager

    Eaton Vance

    The general market may be unaware that the risk of a writedown or conversion is not truly a major concern at present.

    Latest advisory blog entry

    February 10, 2016 | 3:15 PM

    Muni market outlook: Yield curve in 2016

    THIRD IN A SERIES

    Earlier this week, our municipal bond group offered our 2016 outlook on interest rates as it relates to the muni bond market. In this post, we want to focus on our expectations for changes to the muni yield curve* this year.

    We saw a slight flattening of the muni yield curve in 2015. At the end of the year, the spread between AAA one- and 30-year bonds was at 232 basis points (bps), slightly below the 10-year average, but still wide of the narrowest spread in 2007. The chart below illustrates these points.

    As we wrote earlier this week, we do not believe that the Fed will raise short-term rates significantly in 2016. Additionally, we think that long bonds could rally due to uncertainty over global growth, which would result in a further flattening of the yield curve.

    We find value in analyzing the overall shape of the curve to find ranges that may offer an attractive mix of risk and return. In the possible scenario of a flattening yield curve with short-term rates rising slightly and long-term rates flat-to-falling, we think intermediate- and long-term bonds may outperform short-term bonds. However, many investors may be uncomfortable with long-end volatility or simply have a shorter investment horizon.

    Bottom line: An equal-weighted muni bond ladder may offer attractive “roll return” as well as potential for outperformance in a continuing flattening scenario. We see the 5- to 15-year maturity range as an attractive option for investors to consider. This range combines the 2020 sweet spot with the attractive relative value in 2030, in our view.

    Our 2016 outlook blog series will continue later this week with an examination of issuer credit quality and the potential impact from Puerto Rico.




    *Yield curve is a graphical representation of the yields offered by bonds of various maturities. The yield curve flattens when long-term rates fall and/or short-term rates increase, and the yield curve steepens when long-term rates increase and/or short-term rates fall.

    Past performance is no guarantee of future results.

    An imbalance in supply and demand in the municipal market may result in valuation uncertainties and greater volatility, less liquidity, widening credit spreads and a lack of price transparency in the market. There generally is limited public information about municipal issuers. As interest rates rise, the value of certain income investments is likely to decline. Longer-term bonds typically are more sensitive to interest-rate changes than shorter-term bonds.

    Jim Evans, CFA

    Director of Tax Advantaged Bond Strategies

    Eaton Vance

    We find value in analyzing the overall shape of the curve to find ranges that may offer an attractive mix of risk and return.

    Latest advisory blog entry

    February 9, 2016 | 4:00 PM

    How "cheap" is today's high-yield bond market?

    The history of high-yield bonds has taught us that patience is often rewarded. Volatility has resulted in a yield to maturity* on the BofA/Merrill Lynch U.S. High-Yield Master II Index that stood at 9.2% on January 31, 2016, with valuations that look more attractive than they have in a long time.

    The chart below shows 25 instances since 1988 (when high-yield spreads over U.S. Treasurys were first tracked) through December 31, 2015 in which spreads** were about as wide as they were on that date (plus or minus 30 basis points (bps)). Annualized total returns for the three subsequent years ranged from 5.7% to 19.3%, with a median of 11.7%.

    With high-yield defaults averaging about 2% over the long term, and recovery rates averaging about 40%, exposure to credit loss would be about 120bps per year on average. That leaves a considerable total return cushion if the default rate rises in the coming year – something we expect, given that 15% of the asset class is exposed to the energy, mining and materials sectors.

    Worries about credit health in the energy, mining and materials sectors are legitimate. However, these concerns have also led to a broad selloff in high yield and created a buying opportunity. The market is already discounting default rates that are several times the current level. This suggests that investors with a medium- to longer-term horizon, who are comfortable with taking more risk and potential volatility, may want to consider high-yield bonds.

    Bottom line: It may make sense to consider dollar-cost averaging in at this time and investing with an active manager with a process devoted to avoiding land mines. Active management, professional expertise and due diligence are key in this market.




    *Yield to maturity is the total return anticipated on a bond if it is held until the end of its lifetime, expressed as an annual rate.

    **Spread is the difference between the yield of a security and a comparable duration U.S. Treasury.

    Past performance is no guarantee of future results.

    Dollar-cost averaging does not guarantee profit or eliminate the risk of loss.

    The success of any investment program depends on portfolio management's successful application of analytical skills and investment judgment. Active management involves subjective decisions.

    An imbalance in supply and demand in the income market may result in valuation uncertainties and greater volatility, less liquidity, widening credit spreads and a lack of price transparency in the market. Investments rated below investment grade (typically referred to as "junk") are generally subject to greater price volatility and illiquidity than higher-rated investments.

    Payson F. Swaffield, CFA

    Chief Income Investment Officer

    Eaton Vance

    The market is already discounting default rates that are several times the current level.

    Latest advisory blog entry

    February 8, 2016 | 1:30 PM

    Muni market outlook: Interest rates in 2016

    SECOND IN A SERIES

    Last week, our municipal bond group offered an overview of our 2016 outlook for the muni bond market. In this post, we want to focus on the group’s outlook for interest rates this year.

    Short-term rates rose in 2015 in anticipation of the Fed’s December rate increase, but longer-term rates held steady as inflation and growth remained subdued in the U.S. Looking ahead, we believe it will continue to be a low-rate environment, as the Fed will not raise the fed funds rate substantially in 2016.

    Given our outlook of a continued low rate environment, investors who need income may want to consider muni bonds as a source of yield. As of December 31, 2015, munis (as measured by the Barclays Municipal Bond Index*) were yielding 2.11% on a pretax basis. Under the current maximum tax rate of 44.59%, which includes the tax from the Affordable Care Act and itemized deduction limitations, the tax-equivalent rate climbs to 3.80%. A comparison of yields is shown in the chart below.

    With high tax rates still in effect for the 2016 tax year, we think munis continue to be attractive on a tax-adjusted basis compared to other fixed-income alternatives, as the chart above illustrates.

    Bottom line: Given our view of a generally favorable rate environment, the higher income potential from high-yield muni bonds may be most attractive despite the additional credit risk. That said, we believe that high-yield munis should be a piece of your muni bond exposure, not an entire allocation. Our 2016 outlook blog series will continue later this week with an examination of the muni yield curve** and the implications for muni bond investors.




    *The Barclays Municipal Bond Index is an unmanaged index of municipal bonds traded in the U.S. It is not possible to invest directly in an index. Past performance is no guarantee of future results.

    **Yield curve is a graphical representation of the yields offered by bonds of various maturities. The yield curve flattens when long-term rates fall and/or short-term rates increase, and the yield curve steepens when long-term rates increase and/or short-term rates fall.

    Past performance is no guarantee of future results.

    An imbalance in supply and demand in the municipal market may result in valuation uncertainties and greater volatility, less liquidity, widening credit spreads and a lack of price transparency in the market. There generally is limited public information about municipal issuers. As interest rates rise, the value of certain income investments is likely to decline. Longer-term bonds typically are more sensitive to interest-rate changes than shorter-term bonds.

    Cynthia Clemson

    Co-Director of Municipal Investments

    Eaton Vance

    Investors who need income may want to consider muni bonds as a source of yield.

    Latest advisory blog entry

    February 5, 2016 | 3:30 PM

    A value opportunity in loan land

    History shows that the floating-rate loan market has often rewarded investors with patience, as Payson Swaffield pointed out last week. We agree that with the recent volatility in the market, valuations are looking as attractive as they’ve been in a long time.

    In fact, save for the financial crisis in 2008, spreads* are near the widest levels the market has witnessed in over a decade. The latest Eaton Vance Monthly Market Monitor highlights this on page 10 and in the chart shown below. With loans trading near 90 cents on the dollar on average, we see a major disconnect between fundamental value and the actual prices of loans changing hands in the market today.

    Assuming the Moody’s reported 80% recoveries for first-lien loans, today’s prices imply forward default rates of more than 30%, yet real-world default rates are about 1.5%, with market expectations for low single-digit defaults in the immediate years ahead.

    What does this tell us? Opportunity seems to be knocking in the loan market today. Thanks to Janet Yellen and the Fed, the higher yields of the floating-rate asset class are now that much closer.

    Bottom line: There is good reason, in our view, for investors to consider buying loans, adding to positions or just hanging on. Investors who have done so at levels comparable to current spreads were well rewarded for their patience. Coupon-minus** periods have historically been followed, eventually, by coupon-plus*** performance.




    DOWNLOAD THE NEW MONTHLY MARKET MONITOR: New this month is an overall upgrade to MMM’s look and feel, with optimized charts, improved organization and new clickable “bookmarks” that allow users to quickly navigate each of MMM’s sections. We hope you find these upgrades useful and that our guide continues to serve as a powerful resource.

    *Spread is the difference between the yield of a security and a comparable duration U.S. Treasury.

    **Coupon-minus refers to total return that is below the coupon paid to investors.

    ***Coupon-plus refers to total return that is above the coupon paid to investors.

    Past performance is no guarantee of future results.

    An imbalance in supply and demand in the income market may result in valuation uncertainties and greater volatility, less liquidity, widening credit spreads and a lack of price transparency in the market. Bank loans are subject to prepayment risk. Purchases and sales of bank loans in the secondary market generally are subject to contractual restrictions and may be subject to extended settlement periods.

    Scott Page, CFA

    Co-Director of Bank Loans

    Eaton Vance

    We see a major disconnect between fundamental value and the actual prices of loans.

    Latest advisory blog entry

    February 4, 2016 | 3:00 PM

    What’s next for muni bonds in 2016?

    FIRST IN A SERIES

    In the world of fixed income, boring is the new exciting. Given the volatility and credit concerns over the past year in areas like high-yield corporate debt, municipal (muni) bonds enjoyed a notable-yet-uneventful year in 2015.

    On one hand, muni bonds remarkably outperformed nearly every asset class last year, including U.S. Treasurys and many other fixed-income asset classes. On the other hand, muni bonds’ modest return of 3.30% came without the volatility and turmoil experienced in the equity market and other areas of fixed income. Despite negative headlines over Puerto Rico’s debt challenges, the muni bond market behaved exactly as we expected: a source of diversification and volatility reduction.

    So what’s next for municipal bond investors after back-to-back years of outperformance? When considering the asset class in the context of an entire investment portfolio, the case for muni bonds in 2016 remains strong thanks to:

    • Income that may be exempt from federal and state taxes.
    • Diversification benefits based on low correlations to other asset classes (see chart below).
    • Generally stable-to-improving credit quality.
    • Greater potential of inefficiencies due to the opaque nature of the $3.7 trillion market.

    However, credit spreads* in the municipal marketplace are relatively tight and valuations are not as compelling as they were a year ago. Despite the current market environment for muni bonds – tight spreads, low rates and rich valuations – we think the muni market is in for a repeat year of investors clipping their coupons.

    Bottom line: We expect muni bonds to provide investor portfolios with diversification benefits, which may be helpful, as volatility is likely to persist in the broader fixed-income market.

    Over the next few days, our municipal bond group will offer a justification by examining our outlook for rates, the muni yield curve**, credit quality of muni bond issuers and current valuations, as well as exploring the risks to our outlook for the muni market in 2016. On Monday, our next entry will offer our outlook on interest rates in 2016 and the effects we expect to see on the muni bond market.




    *Spread is the difference between the yield of a security and a comparable duration U.S. Treasury.

    **Yield curve is a graphical representation of the yields offered by bonds of various maturities. The yield curve flattens when long-term rates fall and/or short-term rates increase, and the yield curve steepens when long-term rates increase and/or short-term rates fall.

    Past performance is no guarantee of future results. Unless otherwise stated, index returns do not reflect the effect of any applicable sales charges, commissions, expenses, taxes or leverage, as applicable. It is not possible to invest directly in an index.

    Craig Brandon, CFA

    Co-Director of Municipal Investments

    Eaton Vance

    The case for muni bonds in 2016 remains strong.

    Latest advisory blog entry

    February 3, 2016 | 10:15 AM

    Time to shine for active management

    Earnings season is in full swing. This week, close to one-third of S&P 500 companies will report fourth-quarter results. Many advisors and investors think the operating performance of individual companies is taking a backseat to concerns about the macro environment these days. And maybe they’re right, at least on a short-term, day-to-day, basis.

    There are some real concerns out there. What is the ongoing weakness in energy prices, and across the commodity spectrum, telling us? Is the slowdown in China getting worse? Monetary policy, currency trends, the employment picture, inflation, etc. The proverbial “Wall of Worry” is high. Volatility has spiked again recently, while correlations among stocks remain high. From our perspective, however, short-term volatility presents long-term opportunities. Over time, stock prices will follow earnings.

    Highlights from third-quarter earnings reports provide a helpful perspective for the weeks ahead:

    • Going into the quarter, overall expectations had been lowered, especially in the energy sector and for companies that were affected by the dollar’s strength.
    • Relative to those lowered prospects, earnings per share (EPS) results actually came in “OK,” a little better than consensus estimates.
    • Sales results, on the other hand, were notably weak for the third quarter.

    So, as this earnings period unfolds, investors will be especially attuned not only to EPS growth, but to those companies that can show revenue growth in the current difficult environment. When a company’s sales are under pressure, its earnings can still be bolstered by carefully managing expenses, but that can be misleading. Earnings growth without healthy revenue growth over multiple quarters may signal that a company’s competitive position isn’t as strong as it might appear.

    The quality of revenue growth (i.e., from unit gains, not pricing) will also be a meaningful factor. There’s a reason why certain big-name, secular growth stocks did so well in 2015. Despite the fact that they’re large companies, they have still been showing much better-than-average top-line and bottom-line growth, even in a global economy without much momentum.

    How do we recommend investors navigate such an unsettled environment? Regardless of the macro backdrop, stick with quality, well-managed companies that can continue to grow both revenues and earnings. That’s where active management comes in. It’s times like these when skilled stock pickers can potentially add value to investor portfolios.




    Past performance is no guarantee of future results.

    Investing entails risk. The value of your investment will fluctuate over time, and you may gain or lose money.

    Yana S. Barton, CFA

    Portfolio Manager, Growth Team

    Eaton Vance

    Lewis R. Piantedosi

    Portfolio Manager, Growth Team

    Eaton Vance

    Over time, stock prices will follow earnings.

    Latest advisory blog entry

    February 2, 2016 | 3:30 PM

    What to make of Iowa results

    In last month's white paper, “The Metrics and Dynamics Underlying the 2016 Election,” we said that a lack of ground organization might ultimately trip up Donald Trump's campaign. Yesterday’s results in Iowa reflected that deficiency. Trump generates large crowds and great excitement when he flies in to speak. But when he departs, he leaves behind relatively few volunteers knocking on doors – and little guidance as to which doors are worthy of a knock. Ted Cruz and Marco Rubio developed ground organizations and predictive voter data greatly superior to Trump's. Ultimately that proved decisive.

    Lack of ground support might not deter Trump in New Hampshire, but it could be decisive in March when the candidates must campaign simultaneously in a number of states. It is too early to count Trump out, but he will need to shore up his ground operation to continue to do well. That might be harder after showing vulnerability in Iowa.

    We believe the Republican race ultimately will come down to two candidates, Rubio, representing the moderate/establishment wing of the Republican Party, and Cruz, representing the conservative/Tea Party wing.

    Our paper also noted that 42% of voters are Independent – the highest percentage ever for a presidential election – and that capturing those votes could be a key to winning the presidency. We stated, "A candidate who emphasizes fiscal over social issues and exhibits a willingness to work with the other party once elected appears to have a better chance of capturing Independent votes." In this regard, a moderate Republican would appear to have an advantage over a conservative who comes from a wing that tends to be more ideological.

    The dream ticket for the Republicans in the general election? We believe it is Marco Rubio at the top of the ticket and John Kasich as vice president (if Kasich indeed would accept that role). Florida and Ohio are must-win states for the Republicans. Both candidates are moderates who can capture independent votes. Rubio has the added advantage of perhaps swaying some Latino voters to the Republican side. Will Republicans, in fact, choose a moderate over a conservative? That still remains to be seen.

    On the Democratic side, we continue to believe Hillary Clinton will win the Democratic nomination. Iowa (and New Hampshire, for that matter) have a lower percentage of nonwhite voters than do many other states. Clinton, in many ways an extension of the Obama administration, of which she was a part, is likely to do well with those voters in the later primaries.

    Andrew Friedman

    Principal

    The Washington Update

    We believe the Republican race ultimately will come down to two candidates.

    Latest advisory blog entry

    January 29, 2016 | 3:30 PM

    How “cheap” is today’s loan market?

    History shows that the floating-rate loan market has often rewarded investors with patience. With the recent volatility in the market, valuations are looking as attractive as they have been in a long time.

    The chart below shows that since the inception of the S&P/LSTA Leveraged Loan Index* in 1998, there have only been five instances (based on monthly data) when loans have roughly been as “cheap” as they have been recently. Each bar represents a time when the discounted spread on loans** was higher or lower than the December 31 level of 714 bps by no more than 30 bps. Annualized total returns for the two subsequent years were between 5.7% and 8.0%.

    There are some caveats to keep in mind. The “bounce backs” we describe stem largely from the fact that these are “par” loans – the 2% average historical default rate means that, on average, 98% of issuers have redeemed their debt at par. When volatility has pushed prices down, certain investors have noticed, and their buying activity brought prices back up. Having said that, note that although waiting two years after February 2008 would have resulted in an 8.0% annual return (as shown below), the one-year return following this date was negative for loans. We can’t predict exactly when rebounds will occur or to what extent.

    Bottom line: There is good reason, in our view, for investors to consider buying loans, adding to positions or just hanging on. Investors who have done so at levels comparable to current spreads were well rewarded for their patience.




    *The S&P/LSTA U.S. Leveraged Loan Index is designed to reflect the performance of the largest facilities in the leveraged loan market.

    **The discounted spread is a measure of value in loans that combines the price discount from par – expressed as an annualized number based on expected years until redemption or maturity – and the annual yield spread above a loan’s base rate, such as Libor.

    Past performance is no guarantee of future results.

    An imbalance in supply and demand in the income market may result in valuation uncertainties and greater volatility, less liquidity, widening credit spreads and a lack of price transparency in the market. Bank loans are subject to prepayment risk. Purchases and sales of bank loans in the secondary market generally are subject to contractual restrictions and may be subject to extended settlement periods.

    Payson F. Swaffield, CFA

    Chief Income Investment Officer

    Eaton Vance

    With the recent volatility in the market, valuations are looking as attractive as they have been in a long time.

    Latest advisory blog entry

    January 28, 2016 | 11:45 AM

    March madness for the Fed?

    As expected, the Fed took no action on Wednesday, leaving rates unchanged. There was no postmeeting press conference, leaving the world to parse through a one-page statement, trying to determine the meaning of slight tweaks in “Fed speak.”

    Some Fed observers believed the Fed might explicitly take a March rate hike off the table because of the year’s rough start in risk assets. It appears the Fed knew better than to overreact to a few rough weeks. The Fed appropriately wants more time to see if market gyrations are in fact an indicator of slowing economic growth or a mere tantrum in markets. The stock market has predicted nine of the last five recessions, after all.

    As for details of the statement:

    • The Fed remains very comfortable with the strength of the labor market despite a slowing manufacturing sector, as it mentioned, “Labor market conditions improved further even as economic growth slowed late last year.”
    • The Fed knows that fourth-quarter GDP in the U.S. is going to come in a bit below the recent trend. This is partially due to a payback from a buildup in inventories and partially due to a stronger U.S. dollar and lower oil suppressing growth in the manufacturing sector.
    • On the inflation front, the Fed expects “inflation to remain low in the near term, in part because of further declines in energy prices.” The addition of this language was dovish; however, perhaps not as dovish as some were expecting.
    • The Fed let the market know it was “closely monitoring global economic and financial developments.”

    The Fed has said it is data-dependent and we continue to believe it will be going forward. So what does this mean? The bar is high for a March rate hike, but not insurmountable. The Fed will need to see volatility in markets calm down and an improvement in economic data before it progresses with another hike, and it will need these to occur very quickly to keep a March rate hike on the table. The market certainly doesn’t believe there is much of a chance, as it only has one rate hike priced in for 2016. It is important to keep in mind the market’s expectations can shift very quickly; after the Fed passed on a hike last September, the market wasn’t pricing in the first hike until March of this year. After the market calmed down in the fall and we had decent jobs numbers, expectations shifted back to a December hike.

    Bottom line: If the economic data doesn’t improve and we don’t see market volatility decline, the Fed’s decision to stay put in March will be easy.

    Andrew Szczurowski, CFA

    Portfolio Manager, Global Income Group

    Eaton Vance

    It appears the Fed knew better than to overreact to a few rough weeks.

    Latest advisory blog entry

    January 27, 2016 | 11:00 AM

    Politics will move markets in 2016 (and beyond)

    2016 is an election year in the United States. By December 2016, we will know the next U.S. president. Planning will be well underway for Inauguration Day on January 20, 2017. We will also know the makeup of the next Congress. The anticipation of the election as well as the actual results are likely to have a meaningful impact on equity markets.

    It is worth considering the sectors and industries that might stand to benefit, depending on which party comes to power:

    If Republicans win …

    Potential beneficiary Reason
    Oil & Gas More approvals for projects like the Keystone Pipeline.
    Banks Lower compliance and legal costs.
    Defense Higher military spending.


    If Democrats win …

    Potential beneficiary Reason
    Technology More H-1B visas for foreign students entering high-skill professions.
    Alternative Energy Subsidies for green energy.
    Consumer Staples Higher minimum wage to support consumer spending.


    Source: Eaton Vance.

    It is difficult to know where to put the health care sector in the above table. On the one hand, if Democrats win, there may be an effort to put a cap on drug prices. On the other hand, the Affordable Care Act would be more secure, which has been a benefit to HMOs and hospitals, but has also led to a tax on medical device companies.

    The next administration is also likely to have an impact on the U.S. dollar. It is not easy to categorize the Democrats or Republicans as favoring either a strong or a weak dollar. However, the individual candidates appear to have their own preferences.

    Finally, regardless of which party takes power, corporate tax reform seems likely in 2017. Both parties recognize that U.S. businesses are disadvantaged globally, leading to job losses and corporate relocations. The U.S. has not changed its corporate tax rate in a quarter century. Meanwhile, other countries have been steadily cutting theirs, resulting in the U.S. having the highest corporate tax rate in the developed world.

    Edward J. Perkin, CFA

    Chief Equity Investment Officer

    Eaton Vance

    The anticipation of the election as well as the actual results are likely to have a meaningful impact on equity markets.

    Latest advisory blog entry

    January 26, 2016 | 2:45 PM

    If it ain’t one thing, it’s another

    It’s always something when it comes to the U.S. economy. We enter 2016 with a generally upbeat outlook mainly because consumers, who account for an estimated 70% of GDP, are benefiting from both wage gains and lower energy prices. It also appears likely that commodities are nearing the end of their bear market, thereby relieving pressure on the industrial sectors. Additionally, in light of the recent budget deal there seems to be a reasonable expectation that government spending will begin increasing again.

    Nevertheless, we are likely to start the year slowly as the economy works-off relatively high goods inventories. Fortunately, inventory adjustments don’t typically foretell the end of an economic cycle. As such, we expect that 2016 growth will fall in the same 1.5%-to-2.5% range that has defined the trend since the financial crisis.

    While we criticized the Fed for delaying the start of normalizing rates in September, we were part of a consensus opinion the Fed appears to have heard, as it ultimately initiated a well-orchestrated move to increase short-term rates by 25 basis points in December 2015. Like most, we are now focused on the pace of future increases and expect four quarter-point moves higher in 2016; this is a bit above market expectations as a result of our more aggressive inflation forecast. Even though 2016’s Federal Open Market Committee (FOMC) appears more likely to raise rates than last year’s committee, we don’t expect further tightening in the form of unexpected rate moves or a reduction in the Fed’s bond holdings unless inflation exceeds our outlook by a considerable margin.

    If we are right in our view on inflation and Fed policy, it follows that bond yields should end the year higher, but not dramatically so. Inflation above what is priced in the market is the biggest risk we see. Likewise, if the energy and commodity bear markets have run their course, corporate spreads could stabilize in those sectors and begin to retrace last year’s widening.

    Complicating these investment decisions is a world that seems to be ever more geopolitically complex, particularly with the growing threat of global terrorism. Throw in a hotly contested U.S. presidential election and the only conclusion that seems certain is a hugely interesting and provocative 2016.

    Bottom line: Roseanne Roseannadanna famously ended each of her classic “Saturday Night Live” monologues with, “If it ain’t one thing, it’s another.” The challenge of 2016 will be to figure out the other thing before the market does.

    Thomas Luster, CFA

    Co-Director of Diversified Fixed Income

    Eaton Vance

    We are now focused on the pace of future increases.

    Latest advisory blog entry

    January 26, 2016 | 1:30 PM

    U.S. election metrics and dynamics

    2016 is finally here, and with it the long-anticipated national election. While the candidates pontificate and the television networks spin, underlying the election are three fundamental metrics that are crucial for understanding the campaigns and evaluating the possible outcomes.

    • Party Affiliation: 42% of the country is Independent, up two percentage points since the 2012 election and close to the highest percentage in the nation’s history. These numbers, in our view, make capturing the Independent vote one key to winning the election.
    • Demographics: Since the last presidential election, the percentage of nonwhite voters has risen three points to 31%. The percentage of the white population has declined accordingly to 69%. If the next president captures 59% of the white vote, he or she must capture 30% of the nonwhite vote to win the election. The greatest percentage of nonwhite Republican votes was 26% for George W. Bush in 2004 -- four percentage points fewer than the Republican candidate would need in 2016.
    • The Electoral College: To become president, a candidate must garner 270 electoral votes. Tallying the electoral votes from the states Democrats almost will surely win (such as California and New York), plus votes from two states they are likely to win (Iowa and Pennsylvania), yields 249 electoral votes, 21 votes shy of winning the election. The Republicans, on the other hand, can count on 191 electoral votes from states they almost will surely win, leaving them 79 votes short.

    Standing alone, without the benefit of a particular candidate’s personality, the metrics above appear to favor a Democratic candidate. But another important factor favors the Republicans: after two terms of one party in the White House, the electorate tends to want to switch to the opposing party.

    The Republicans, too, must contend with party dynamics that could affect their success in the general election: (i) the split between the party’s moderate and conservative factions, and (ii) the ascendency of a candidate who does not fit neatly into either faction, Donald Trump.

    For investors, if Trump does well in the early primaries and builds momentum toward the convention, look for the markets to become much more volatile. Similarly, markets are likely to react negatively if Clinton ramps up her anti-Wall Street rhetoric to fend off challenges to her left, or if (far less likely) Bernie Sanders manages seriously to undermine her front runner status.

    Bottom line: Each presidential election stands on its own. It cannot be reduced to numbers and historical analogies. The candidates’ respective policies, personalities, and ability to connect with voters ultimately will decide the winner.

      Andrew Friedman

      Principal

      The Washington Update

      Look for the markets to become much more volatile.

       

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