CAM High Yield Weekly Insights

CAM High Yield Market Note

9/6/2019

Fund Flows & Issuance: According to a Wells Fargo report, flows week to date were -$0.2 billion and year to date flows stand at $13.4 billion. New issuance for the week was $2.8 billion and year to date HY is at $167.8 billion, which is +28% over the same period last year.

(Bloomberg) High Yield Market Highlights

• U.S. junk bonds are poised to extend their third straight week of gains as stock futures edged higher ahead of the monthly jobs report and remarks by Chair Jerome Powell in Zurich. Yields dropped to an 11-week low on Thursday to 5.7%, and spreads tightened to a five-week low of +388bps.
• Investor demand for the debt bolstered issuance even as retail funds faced outflows.
• Supply kept up its steady momentum and five of six deals were BB credits; all were drive-by offerings pricing at the lower end of price talk
• The primary is expected to maintain momentum this month, with September issuance of about $20-$25b, according to preliminary estimates from three dealers
• The Bloomberg Barclays High Yield Index saw the biggest drop in yields in two weeks, with bonds posting gains across all ratings. Returns in the index climbed to a fresh year-to-date high of 11.17%
• CCC yields closed at 10.86%, a drop of 3bps
• Spreads ended at +913bps, biggest decline in two weeks
• BB returns rose to 12.625%, a new 2019 high and the best in high yield, after gaining 0.136%
• Single-B yields also dropped to a 11-week low to 5.84%, the biggest fall in two weeks
• Single-Bs are at 11.43%, also a YTD high, after +0.18%
• CCCs were at 5.672% after a gain of 0.057%

Reuters) To cut or not? Dueling Fed views boost pressure on Powell

• The Federal Reserve should use its meeting in two weeks to aggressively cut interest rates, one U.S. central banker said on Tuesday.
• Less than an hour later, a second U.S. central banker said he saw no need to use up the Fed’s precious firepower when the economy is growing, inflation looks stable and labor markets are in good shape.
• The dueling views – from St. Louis Fed President James Bullard, who called for a half-a-percentage-point rate cut, and Boston Fed President Eric Rosengren, who saw no immediate need for any move – show the tight spot Fed Chair Jerome Powell finds himself in as the Fed’s next policy-setting meeting approaches.
• On one hand, the escalating U.S.-China trade war and a global economic slowdown have begun to pinch U.S. business spending and manufacturing output, posing a threat to the broader U.S. economy.
• But Americans continue to spend, wages are rising and employers keep adding jobs, suggesting a downturn is not on the horizon.
• Although Powell has said the Fed will act “as appropriate” to keep the economy growing, there is plenty of disagreement among his fellow rate-setters about what that two-word phrase means in practice.  

• (Bloomberg) U.S. Junk Bond Market Springs Back to Life With Three New Deals

• High-yield borrowers are jumping back into the market after a three-week hiatus with at least a trio of issuers expected to price bonds on Wednesday.

• Restaurant chain operator Yum! Brands, E&P company Murphy Oil and data storage manager Iron Mountain announced new offerings and are each targeting 10-year bonds
• The deals follow the reopening of the high-yield market on Tuesday by Icahn Enterprises, which was the first junk bond to price in three weeks
• Borrowers are selling new bonds mostly to refinance and repay existing debt following a recovery in spreads from August’s sell-off. High-yield bond spreads have rallied to two-month lows of 396bps over U.S. Treasuries after widening to 444bps last month, according to Bloomberg Barclays data
• Icahn’s new $500 million 4.75% 2024 bond edged higher in secondary trading to 100.125, according to Trace pricing. It priced at par.
• The deal was well received. It saw investor orders of more than $1.5 billion, helped by its higher double B ratings.
• Two of today’s offerings have similar ratings, which will likely appeal to investors looking to buy higher credit quality bonds.

(Bloomberg) With 49 Deals in 30 Hours, U.S. Corporate Bond Market Ignites

• A record number of companies borrowed in the U.S. investment-grade bond market this week as plunging yields spurred another wave of refinancing. And the frenzy isn’t letting up. Since Tuesday, corporations including Coca-Cola Co., Walt Disney Co., and Apple Inc. have sold or are selling notes, bringing the total number of sellers to 49.
• Completed sales totaled $54 billion through Wednesday, putting this week on track to be the busiest ever for corporate bond deals. At least another $70 billion are projected for the rest of the month, and the activity is spilling over to junk bonds and leveraged loans as well. With more than $16 trillion of bonds in Europe and Asia paying negative yields, investors worldwide are snatching up debt that offers higher returns, keeping demand strong in the U.S.
• For investment-grade companies, the average yield on bonds was 2.77% as of Wednesday, according to Bloomberg Barclays index data. In late November, that figure was above 4.3%. For a company selling $1 billion of debt, that amounts to $15.3 million of annual interest savings, before taxes. Junk-bond yields have dropped too, with notes rated in the BB tier, the uppermost high-yield levels, paying a near record-low 4.07%.
• It’s not clear how long that will last — on Thursday, U.S. Treasury yields surged, with the 10-year note jumping as much as 0.12 percentage point to 1.59%.
• In the leveraged loan market, 17 deals totaling more than $16 billion have launched this week, making it the busiest week since October. Investment-grade and high-yield bankers are telling clients that the good times may not last.
• “If someone has near-term financing needs, they should be looking to take advantage of this window,” said Jenny Lee, co-head of leveraged loan and high-yield capital markets at JPMorgan Chase & Co. “Things potentially could shut down or get more difficult as we head toward the back half of this year.”