CAM High Yield Weekly Insights

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were -$1.2 billion and year to date flows stand at -$3.0 billion.  New issuance for the week was $5.2 billion and year to date issuance is at $404.4 billion.

(Bloomberg)  High Yield Market Highlights

• Junk bonds bounced back from a recent dip, taking a cue from equities, to post the biggest one-day gains in seven and yields saw the biggest decline in almost five weeks, ending the day at 4.19%.
• The junk bond index is poised to snap its three-week losing streak and post the biggest gains since mid-September, with week-to-date returns of 0.11%
• Gains were across the board as oil prices closed at a seven-year high of $81.31 on Thursday.
• Primary market resilience was evident as issuance continued at a steady pace.
• US. junk-bond investors, while continuing their search for yield, were demanding appropriate risk premium.
• Amid broader resilience, investors are growing cautious amid concerns about increasing volatility. That was evident in the lack of interest as debt-laden alarm company Monitronics International struggles to find enough buyers for its $1.1b 7-year notes, the inaugural bond offering since emerging from bankruptcy two years ago.
• These were slated to price earlier in the week.
• Investors also pulled cash from retail funds, with an outflow of $1.2b from U.S. high yield funds, the biggest since mid-June.
• The broader junk bond index spreads dropped 6bps to +295bps and posted gains of 0.29% on Thursday, the biggest one-day returns since March.
• Single B yields also dropped 12bps to close at 4.60%, the biggest decline in six weeks, and the index posted gains of 0.29%, also the biggest since March.

(CNBC)  Fed says it could begin ‘gradual tapering process’ by mid-November

• Federal Reserve officials could begin reducing the extraordinary help they’ve been providing to the economy by as soon as mid-November, according to minutes from the central bank’s September meeting released Wednesday.
• The meeting summary indicated members feel the Fed has come close to reaching its economic goals and soon could begin normalizing policy by reducing the pace of its monthly asset purchases.
• In a process known as tapering, the Fed would reduce the $120 billion a month in bond buys slowly. The minutes indicated the central bank probably would start by cutting $10 billion a month in Treasurys and $5 billion a month in mortgage-backed securities. The Fed is currently buying at least $80 billion in Treasurys and $40 billion in MBS.
• The target date to end the purchases should there be no disruptions would be mid-2022.
• The minutes noted “participants generally assessed that, provided that the economic recovery remained broadly on track, a gradual tapering process that concluded around the middle of next year would likely be appropriate.”
• “Participants noted that if a decision to begin tapering purchases occurred at the next meeting, the process of tapering could commence with the monthly purchase calendars beginning in either mid-November or mid-December,” the summary said.
• St. Louis Fed President James Bullard told CNBC on Tuesdaythat he thinks tapering should be more aggressive in case the Fed needs to rate interest rates next year to combat persistent inflation.
• At the September policymaking session, the committee voted unanimously to hold the central bank’s benchmark short-term borrowing rate at zero to 0.25%.
• The committee also released the summary of its economic expectations, including projections for GDP growth, inflation and unemployment. Members scaled back their GDP estimates for this year but upped their outlook for inflation, and indicated they expect unemployment to be lower than earlier estimates.
• In the “dot plot” of individual members’ expectations for interest rates, the committee indicated it could begin raising interest rates as soon as 2022. Markets currently are pricing in the first rate hike for next September, according to the CME FedWatch tool. Following the release of the minutes, traders increased the likelihood of a September hike to 65% from 62%.
• Officials, though, stressed that a tapering decision should not be seen as implying pending interest rate hikes.
• However, some members at the meeting showed concern that current inflation pressures might last longer than they had anticipated. Traders are pricing in a 46% chance of two rate hikes in 2022.
• “Most participants saw inflation risks as weighted to the upside because of concerns that supply disruptions and labor shortages might last longer and might have larger or more persistent effects on prices and wages than they currently assumed,” the minutes stated.
• The document noted that “a few participants” said there could be some “downside risks” for inflation as long-standing factors that have kept prices in check come back into play. The majority of Fed officials have been holding to theme that the current price increases are transitory and due to supply chain bottlenecks, and other factors likely to subside.
• Inflation pressures have continued, though, with a reading Wednesday showing that consumer prices are up 5.4% over the past year, the fastest pace in decades.