CAM High Yield Weekly Insights

Fund Flows & Issuance: According to a Wells Fargo report, flows week to date were -$1.0 billion and year to date flows stand at -$22.7 billion. New issuance for the week was $3.3 billion and year to date HY is at $53.1 billion, which is -27% over the same period last year. 

(Bloomberg) High Yield Market Highlights

• Junk bonds have been impervious to tumbling stocks and rising VIX amid threats of potential trade war, as the new issue market priced Cequel Communications, a CCC-credit, in a drive-by offering yesterday.
• Yields were resilient as they rose by just 0.6% across ratings, while stocks plunged more than 2.5%, the biggest drop in six weeks; VIX rose more than 30%, also the biggest jump in six weeks
• Investors, though cautious, also seem to shrug off another outflow from retail funds
• There was no evidence of any panic selloff as yields were on a holding pattern and investors on watch mode
• Oil was still near a 6-week high and has been rising in 6 of the last 10 sessions
• BofAML strategist Oleg Melentyev wrote in note earlier in the week that technicals are still constructive, and pressure would build up to put cash to work amid light supply; April would see coupon generation of about $7.4b in cash
• CCC credits continued to outperform BBs and single-Bs with positive YTD returns of 0.47%, as additional evidence of the strength of junk bond market
• BBs were the worst, with negative YTD returns of 1.55%, followed by single-Bs negative 0.36%
• Junk bond market was now stronger qualitatively, with issuers rated B3 and lower declining in numbers; Moody’s notes that issuers rated B3 and lower dropped to 13%, below the long-term average of 15% for the 6th straight month  

• (CNBC) Fed hikes rates and raises GDP forecast again 

• Interest rates are going up again, thanks to a well-telegraphed Federal Reserve move Wednesday.
• Central bankers, led by Jerome Powell in his first meeting as chairman, approved the widely expected quarter-point hike that puts the new benchmark funds rate at a target of 1.5 percent to 1.75 percent. It was the sixth rate hike since the policymaking Federal Open Market Committee began raising rates off near-zero in December 2015.
• Along with the increase came another upgrade in the Fed’s economic forecast, and a hint that the path of rate hikes could be more aggressive. The market currently expects three hikes for 2018, and that remained the baseline forecast, but at least one more increase was added in the following two years.
• “The economic outlook has strengthened in recent months,” the committee said in its post-meeting statement, a sentence that had not been in previous releases. The language came even though the committee said earlier in the statement that “economic activity has been rising at a moderate rate,” a seeming downgrade from January’s characterization of a “solid” rate.
• Fed officials raised their forecast for 2018 GDP growth from 2.5 percent in December to 2.7 percent, and increased the 2019 expectation from 2.1 percent to 2.4 percent.
• However, growth is likely to cool after, with the 2020 forecast holding at 2 percent and the longer-run measure still at 1.8 percent.
• Inflation expectations, on which the market has been laser-focused lately, changed little. The 2018 forecast remains just 1.9 percent for both core and headline inflation — core excludes food and energy prices. For 2019, the forecast for core personal consumption expenditures edged higher to 2.1 percent from 2 percent, while headline remained at 2 percent. The committee nudged the 2020 level up from 2 percent to 2.1 percent for both core and headline.
• The benign inflation expectations are particularly remarkable considering that Fed officials now see unemployment running even lower than before. Currently at 4.1 percent, officials now see the rate for 2018 at 3.8 percent, down from the 3.9 percent December forecast, and 2019 falling all the way to 3.6 percent from the original 3.9 percent outlook. The 2020 forecast also fell, from 4 percent to 3.6 percent.
• The so-called dot plot, which indicates individual members’ rate expectations, took a hawkish tilt. While a three-hike policy remains the baseline for 2018, the committee pushed 2019 from 2½ to three increases and 2020 from 1½ to two. The funds rate for 2020 is now expected to be 3.4 percent from the initial 3.1 percent, though the longer-run forecast rose just a bit, from 2.8 percent to 2.9 percent.  

• (Bloomberg) As Commodities Roar, Africa Wants Bigger Slice of Mining Pie

• The collapse in commodities through 2015 hobbled some of Africa’s biggest resource economies, stunting growth and leaving budgets short. Since then a recovery in prices has sent the continent’s biggest miners soaring, boosted profits and rewarded shareholders with bumper payouts. But a lack of returns to governments is drawing a backlash from Mali in the Sahara to Tanzania on the Indian Ocean.
• Zambia is the latest flash point. Africa’s second-biggest copper producer slapped a $7.9 billion tax assessment on First Quantum Minerals Ltd. and said it’s planning an audit of other miners in the country. Companies operating in Zambia include units of Glencore Plc and Vedanta Resources Plc.
• Next door in the Democratic Republic of Congo, Glencore, the world’s biggest commodity trader, is dealing with a dispute over a new mining code that dramatically boosts taxes, while major gold producer Mali has reportedly saidit might follow Congo’s example. Tanzania has all but crippled its biggest gold miner Acacia Mining Plc, a unit of Barrick Gold Corp., with export bans and a whopping $190 billion tax bill.