CAM High Yield Weekly Insights

Fund Flows & Issuance: According to a Wells Fargo report, flows week to date were -$0.4 billion and year to date flows stand at -$26.0 billion. New issuance for the week was $1.7 billion and year to date issuance is at $34.9 billion.

(Bloomberg) High Yield Market Highlights

• U.S. junk bonds are headed to the first back-to-back weekly gains since December with the risk-off mood easing after Federal Reserve Chair Jerome Powell said U.S. economic growth was strong enough to warrant a quarter-percentage-point interest rate hike this month.
• That buoyed a market that had been weighed down by uncertainty over the economic outlook and the scope of the Fed’s coming interest rate hikes; traders last month speculated that the Fed could begin with a half-point rate increase.
• Even as the war in Ukraine intensifies and commodity prices soar, credit market technicals have held up, Barclays’ strategist Brad Rogoff wrote on Friday, though he added that spreads could come under pressure near-term.
• While sustained higher energy prices pose downside risks to the outlook, Barclays does not view them as sufficient to derail the recovery, Rogoff wrote.
• Yields have been resilient through the week, closing unchanged at 5.66% week-to- date.
• The 5-year and 10-year Treasury yields fell about 13bps week-to-date at close yesterday at 1.73% and 1.84%, respectively.
• Spreads closed at +358bps, just up by 5bps
• Junk bonds gained across ratings for the second straight week, with 0.21% returns for BBs, 0.22% single Bs and 0.15% CCCs.
• CCCs have lost some momentum and were the worst performing segment for the second consecutive week, pushing single Bs to the top.
• U.S. high yield may be in a holding pattern as equity futures slide and European stocks tumble to a one-year low as war risks intensified. Oil, meanwhile, is headed for the biggest weekly surge in almost two years after Russia’s invasion of Ukraine roiled global markets. 

(Bloomberg) Powell Backs Quarter-Point March Rate Hike, Open to Bigger Moves

• Federal Reserve Chair Jerome Powell backed a quarter-point interest-rate hike this month to commence a series of increases and didn’t rule out a larger move at some stage, despite uncertainty caused by Russia’s invasion of Ukraine.
• “I am inclined to propose and support a 25 basis-point rate hike,” Powell told the House Financial Services Committee Wednesday. “To the extent that inflation comes in higher or is more persistently high than that, then we would be prepared to move more aggressively by raising the federal funds rate by more than 25 basis points at a meeting or meetings.”
• Fed officials are pivoting to tackle the fastest inflation in 40 years and a few have publicly discussed the potential need to hike by a half point some time this year if inflation comes in too hot. They get February data on consumer prices on March 10, five days before they start their next policy meeting.
• While acknowledging the uncertainty posed by the attack on Ukraine, Powell said the need to remove pandemic policy support had not changed.
• “The bottom line is that we will proceed but we will proceed carefully as we learn more about the implications of the Ukraine war for the economy,” he said.
• Investors increased their bets on the pace of rate hikes this year as the Fed chief spoke, pricing in around 140 basis points of tightening starting this month — which will mark the first increase since 2018. U.S. stocks advanced and 10-year Treasury yields rose on Powell’s message that the economy is expanding with enough force to withstand higher borrowing costs.
• Powell said the labor market is “extremely tight,” essentially a message to lawmakers that the central bank has met its maximum employment goal in current conditions, which opens the door to its inflation fight. He said employers are having difficulties filling job openings, while workers are quitting and taking new jobs, helping wages rise at the fastest pace in years.
• “We know that the best thing we can do to support a strong labor market is to promote a long expansion, and that is only possible in an environment of price stability,” Powell said, restating a line he has used several times now that interprets the inflation fight in terms of preserving the expansion.
• The Fed chief said it wasn’t clear how high rates would have to rise to get inflation under control, in relation to the so-called “neutral” level that neither speeds up nor slows economic activity.
• “We talk about getting to neutral, which is a neutral rate which would be somewhere between 2% and 2.5%. It may well be that we need to go higher than that. We just don’t know,” he said, adding that he believed it was possible to deliver that tightening without causing a recession.