2024 Q4 High Yield Quarterly
January 2025
In the fourth quarter of 2024, the Bloomberg US Corporate High Yield Index (“Index”) return was 0.17% bringing the year to date (“YTD”) return to 8.19%. The S&P 500 index return was 2.39% (including dividends reinvested) bringing the YTD return to 25.00%. Over the period, while the 10 year Treasury yield increased 79 basis points, the Index option adjusted spread (“OAS”) tightened 8 basis points moving from 295 basis points to 287 basis points.
With regard to ratings segments of the High Yield Market, BB rated securities tightened 1 basis point, B rated securities tightened 8 basis points, and CCC rated securities tightened 84 basis points. The chart below from Bloomberg displays the spread moves in the Index over the past five years. For reference, the average level over that time period was 396 basis points.
The sector and industry returns in this paragraph are all Index return numbers. The Index is mapped in a manner where the “sector” is broader with the more specific “industry” beneath it. For example, Energy is a “sector” and the “industries” within the Energy sector include independent energy, integrated energy, midstream, oil field services, and refining. The Transportation, Communications, and Brokerage sectors were the best performers during the quarter, posting returns of 1.79%, 1.47%, and 1.00%, respectively. On the other hand, REITs, Utilities, and Capital Goods were the worst performing sectors, posting returns of -1.54%, -1.17%, and -0.68%, respectively. At the industry level, railroads, wirelines, and media all posted the best returns. The railroads industry posted the highest return of 6.57%. The lowest performing industries during the quarter were healthcare REITs, health insurance, and office REITs. The healthcare REITs industry posted the lowest return of -5.04%.
The year concluded with strong issuance during Q4 after the very strong issuance during the first three quarters of the year. The $67.6 billion figure is the most volume for a fourth quarter in three years. Of the issuance that did take place during Q4, Discretionary took 25% of the market share followed by Financials at 22% share and Communications at 12% share.
The Federal Reserve did lower the Target Rate at the November meeting and the December meeting. There was no meeting held in October. That brings the current Fed easing cycle to 100 basis points in total cuts. They kicked off this cycle with a 50 basis point cut at their September meeting. The Fed dot plot continues to moderate for 2025 now showing only 50 additional basis points of cuts expected for the year. Market participants are forecasting a bit more aggressive Fed and are expecting 83 basis points in cuts for 2025.1 After the cut at the December meeting Fed Chair Jerome Powell commented, “With today’s action, we have lowered our policy rate by a full percentage point from its peak and our policy stance is now significantly less restrictive.” Powell continued, “We can therefore be more cautious as we consider further adjustments to our policy rate.”2 While the Fed is on track to continue cutting rates, they are looking for more progress on inflation before making another move lower. Further, at this juncture, the Fed is comfortable with the current state of the labor market.
Intermediate Treasuries increased 79 basis points over the quarter, as the 10-year Treasury yield was at 3.78% on September 30th, and 4.57% at the end of the fourth quarter. The 5-year Treasury increased 82 basis points over the quarter, moving from 3.56% on September 30th, to 4.38% at the end of the fourth quarter. Intermediate term yields more often reflect GDP and expectations for future economic growth and inflation rather than actions taken by the FOMC to adjust the target rate. The revised third quarter GDP print was 3.1% (quarter over quarter annualized rate). Looking forward, the current consensus view of economists suggests a GDP for 2025 around 2.1% with inflation expectations around 2.5%.3
Being a more conservative asset manager, Cincinnati Asset Management does not buy CCC and lower rated securities. Additionally, our interest rate agnostic philosophy keeps us generally positioned in the five to ten year maturity timeframe. During Q4, our higher quality positioning was a drag on performance as lower rated securities significantly outperformed. Further, Index performance was driven by maturity buckets of 3 years and shorter. Additional performance detractors were our credit selections within the capital goods sector and our underweight in the communications sector. Benefiting our performance this quarter were our credit selections in the banking sector, consumer products industry, and consumer cyclical services industry. Another benefit was added due to our underweight in the REITs sector.
The Bloomberg US Corporate High Yield Index ended the fourth quarter with a yield of 7.49%. Treasury volatility, as measured by the Merrill Lynch Option Volatility Estimate (“MOVE” Index), remains elevated from the 78 index average over the past 10 years. The current rate of 98 is well below the spike near 200 back during the March 2023 banking scare. The MOVE Index does show a general downward trend over the last two years. Data available through November shows 29 bond defaults during 2024 which is relative to 16 defaults in all of 2022 and 41 defaults in all of 2023. The trailing twelve month dollar-weighted bond default rate is 1.80%.4 The current default rate is relative to the 2.38%, 2.67%, 2.15%, 1.85% default rates from the previous four quarter end data points listed oldest to most recent. Defaults are ticking lower and the fundamentals of high yield companies are in decent shape. From a technical view, fund flows were positive in the quarter at $6.6 billion.5 No doubt there are risks, but we are of the belief that for clients that have an investment horizon over a complete market cycle, high yield deserves to be considered as part of the portfolio allocation.
The high yield market continues to hum along with positive performance and attractive yields. Corporate fundamentals are broadly in good shape, defaults have moved lower, and issuance remains robust. GDP still looks good. Three months back the labor market appeared a bit wobbly, but it has proved resilient. There are some concerns regarding the consumer, and the Fed is eyeing a bit of needed inflation improvement. Looking ahead, the new US administration should keep things interesting. The Fed is evaluating the impact of potential presidential policies but have not yet incorporated them into any decision making saying that it is “very premature.” In other words, the Fed is data dependent. Our exercise of discipline and credit selectivity is important as we continue to evaluate that the given compensation for the perceived level of risk remains appropriate. As always, we will continue our search for value and adjust positions as we uncover compelling situations. Finally, we are very grateful for the trust placed in our team to manage your capital.
This information is intended solely to report on investment strategies identified by Cincinnati Asset Management. Opinions and estimates offered constitute our judgment and are subject to change without notice, as are statements of financial market trends, which are based on current market conditions. This material is not intended as an offer or solicitation to buy, hold or sell any financial instrument. Fixed income securities may be sensitive to prevailing interest rates. When rates rise the value generally declines. Past performance is not a guarantee of future results. Gross of advisory fee performance does not reflect the deduction of investment advisory fees. Our advisory fees are disclosed in Form ADV Part 2A. Accounts managed through brokerage firm programs usually will include additional fees. Returns are calculated monthly in U.S. dollars and include reinvestment of dividends and interest. The index is unmanaged and does not take into account fees, expenses, and transaction costs. It is shown for comparative purposes and is based on information generally available to the public from sources believed to be reliable. No representation is made to its accuracy or completeness. Additional disclosures on the material risks and potential benefits of investing in corporate bonds are available on our website: https://www.cambonds.com/disclosure-statements/.
Footnotes
Bloomberg January 1, 2025: World Interest Rate Probability
Bloomberg December 18, 2024: Powell Says Future Cuts Would Require Fresh Inflation Progress
Bloomberg January 1, 2025: Economic Forecasts (ECFC)
Moody’s December 16, 2024: November 2024 Default Report and data file
Bloomberg January 1, 2025: Fund Flows