CAM High Yield Weekly Insights

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were $1.9 billion and year to date flows stand at $49.8 billion.  New issuance for the week was $1.8 billion and year to date issuance is at $286.1 billion.

(Bloomberg)  High Yield Market Highlights

• S. junk bonds rallied in the wake of the Fed’s shift to a more tolerant approach on inflation with the lowest-rated bonds in the CCC tier leading the way.
• The average spread over Treasuries for bonds in the Bloomberg Barclays CCC index tightened 5 basis points to 986 basis points more than Treasuries, the lowest since Feb. 27
• CCCs have gained 1.02% this week and 1.63% month-to-date, beating single Bs for the fourth straight month and BBs for the third time since April, according to data compiled by Bloomberg
• Junk bond investors returned to the asset class with an inflow of $1.9 billion into U.S. high yield funds for the week
• August issuance is likely close out at almost $53b, the second-busiest month on record, as the summer lull sets in
• September is shaping up to be a relatively busy month for junk bond sales, with at least one dealer estimating volume of $35b-$40b, higher than the usual $25b- $35b
• Junk-bond spreads tightened 3bps to a more than two-week low of +477bps. Yields fell to 5.39%

(Bloomberg)   Fed Seen Holding Rates at Zero for Five Years in New Policy

• The Federal Reserve looks likely to keep short-term interest rates near zero for five years or possibly more after it adopts a new strategy for carrying out monetary policy.
• The new approach, which could be unveiled as soon as next month, is likely to result in policy makers taking a more relaxed view toward inflation, even to the point of welcoming a modest, temporary rise above their 2% target to make up for past shortfalls.
• Fed Chairman Jerome Powell is slated to provide an update on the Fed’s 1-1/2-year-old framework review of its policies and practices when he speaks on Thursday to the central bank’s Jackson Hole conference, being held virtually this year because of the coronavirus pandemic.
• At their June meeting, all 17 Fed policy makers projected that the federal funds rate they target would remain near zero this year and next. And all but two saw rates staying at that level in 2022. Officials will provide updated quarterly forecasts at their meeting next month, including for the first time projections for 2023.
• “We’re not even thinking about thinking about raising rates,” Powell told reporters following the June meeting, in a memorable maxim that he’s repeated since.
• Eurodollar futures aren’t currently pricing any premium for Fed rate hikes until early 2023, with a full quarter-point increase priced in toward the end of 2023. Some traders, though, have viewed this as slightly too dovish, with demand emerging for hedges against a steeper path than is currently priced in for 2023 and 2024. Some see ultra-easy monetary policy eventually spurring inflation.
• In a sign of economic resilience, government data on Wednesday showed U.S. orders for durable goods rose in July by more than double estimates amid a continued surge in automobile demand, indicating factories will help support the rebound in coming months.
• The Fed held rates near zero for seven years during and after the financial crisis before raising them in December 2015. Former Fed Vice Chairman Alan Blinder doubts it will be that long this time, though he adds that he would have said the same thing when the Fed first cut rates effectively to zero in December 2008.
• “It’s perfectly conceivable it could take seven years” before rates are increased, given how difficult it’s been for the Fed to generate faster inflation, said former U.S. central bank official Roberto Perli, who is now a partner at Cornerstone Macro LLC.

(Bloomberg)  Powell’s Fed Shift Allows for Higher Employment and Inflation

• Federal Reserve Chair Jerome Powell unveiled a new approach to setting U.S. monetary policy Thursday in a speech delivered virtually for the central bank’s annual policy symposium traditionally held in Jackson Hole, Wyoming.
• The new approach will allow inflation and employment to run higher in a shift that will likely keep interest rates low for years to come.
• Following a more than year-long review, Powell said the Fed will seek inflation that averages 2% over time, a step that implies allowing for price pressures to overshoot after periods of weakness. It also adjusted its view of full employment to permit labor-market gains to reach more workers.
• “Maximum employment is a broad-based and inclusive goal,” Powell said. “This change reflects our appreciation for the benefits of a strong labor market, particularly for many in low- and moderate-income communities.”
• While the new strategy doesn’t target a specific rate of unemployment broadly or for certain demographic groups, it does give the central bank flexibility to let the job market run hotter and inflation float higher before taking action.
• Powell’s speech left the matter of how tactically they would aim for higher inflation for future Federal Open Market Committee meetings. With the new strategy in place, Goldman Sachs Chief Economist Jan Hatzius said he now expects “changes to the forward guidance and asset purchase program to come at the September” policy meeting.
• In the new statement on longer-run goals, the Fed said its decisions would be informed by its assessment of “shortfalls of employment from its maximum level.” The previous version had referred to “deviations from its maximum level.” The change de-emphasizes previous concerns that low unemployment can cause excess inflation.
• While expected, the announcement of the strategy shift came sooner than some thought. After first fluctuating on the news, U.S. stocks resumed their record-breaking rally and the Treasury yield curve steepened to the widest in two months as traders bet policy rates will remain locked near zero for even longer.
• “Powell is not only saying that they will be more patient in removing the punch bowl in the future, he has changed the recipe for the punch,” said Mark Vitner, senior economist at Wells Fargo & Co. “While the timing comes slightly earlier than had been expected, the Fed is far better served to under-promise and over-deliver, or deliver earlier in this case.”