Author: Josh Adams - Portfolio Manager

It was a wild ride for risk assets during the week and credit spreads will finish the week wider.  The Bloomberg US Corporate Bond Index closed at 144 on Thursday June 16 after having closed the week prior at 136.  The tape has been mixed throughout the day on Friday and is pointing toward a close that looks as though it will be unchanged from Thursday.  The 10yr Treasury is yielding 3.23% as we go to print after having closed the week prior at 3.16% as rates sold off on the back of last Friday’s CPI print which showed that inflation has yet to show signs of slowing.  The 10yr was as low as 2.75% during the last week of May so it has been a significant move in a short timeframe.  The tape was particularly bad for equities this week as there was a brief relief rally on Wednesday post-FOMC but then a violent sell-off on Thursday.  The major indices have been modestly green throughout the day on Friday.  Through Thursday the Corporate Index had a negative YTD total return of -14.99% while the YTD S&P500 Index return was -22.5% and the Nasdaq Composite Index return was -31.6%.

The Federal Reserve delivered a 75bp Fed Funds rate hike on Thursday in its goal to curtail inflation.  It was the largest such rate increase since 1994.  The Fed may well deliver another hike of that magnitude at its July 27 meeting but that depends largely on the economic data between now and then.

The new issue calendar was non-existent this week as precisely $0 in new bonds were issued.  It was the first week of no issuance in 2022 and the first week with no new bonds since 2020 according to Bloomberg. The expectation is that there will be some modest issuance next week if the market tone is constructive.  As we often like to say, the IG market is essentially never closed but it is not uncommon for issuers to wait for a positive tone to issue with the hope that there will be enough investor demand to offer them favorable pricing.  There has been $697bln of new issuance YTD which trails 2021’s pace by 5% according to data compiled by Bloomberg.

Investment grade credit saw a sizeable outflow on the week.  Per data compiled by Wells Fargo, outflows for the week of June 9–June 15 were -$6.4bln which brings the year-to-date total to -$98.2bln.

Credit spreads will finish the week meaningfully tighter for the second week in a row.  The Bloomberg US Corporate Bond Index closed at 149 two weeks ago and 136 last Friday while the index closed this Thursday at an OAS of 130. Spreads have drifted wider during the trading day on Friday so we may close the week slightly wide of 130 but spreads will still finish the week better than where they started.  The 10yr Treasury is yielding 2.95% as we go to print after having closed the week prior at 2.74%.  IG corporate bonds posted their first monthly positive return of the year for May but the Corporate Index had a negative YTD total return of -11.79% through Thursday while the YTD S&P500 Index return was -12.11% and the Nasdaq Composite Index return was -21.3%.

Stocks traded lower on Friday on the back of payrolls data that was viewed as strong enough for the Fed to continue with its likely plan to raise Fed Funds by 50bps at its June meeting.  The next big economic release to watch is CPI on June 10 with the FOMC rate decision to follow on June 15.

The new issue calendar was robust this week considering Memorial Day made for a shortened week.  Issuers priced $29.9bln in new debt which was at the high end of estimates –financial institutions led the way with 75% of weekly volume.  Next week should be another active one for issuance especially if credit spreads continue their positive trajectory.

Investment grade posted another modest outflow this week.  Per data compiled by Wells Fargo, outflows for the week of May 26–June 1 were -$1.1bln which brings the year-to-date total to -$69.4bln.

Credit spreads will finish this week markedly better and there were a couple trading days where spreads ripped tighter.  The Bloomberg US Corporate Bond Index closed at 149 last Friday which was its widest level of the year.  The index closed 13 basis points tighter this Thursday at 136 and the path of least resistance feels tighter as we go to print this Friday morning.  Volumes are muted this morning before the long weekend and the market closes early this afternoon.  The 10yr Treasury is yielding 2.72% as we go to print after having closed the week prior at 2.78%.  The Corporate Index had a negative YTD total return of -11.68% through Friday while the YTD S&P500 Index return was -14.35% and the Nasdaq Composite Index return was -24.96%.

New issue for the week was a complete bust and didn’t even come close to the consensus estimate of $20bln+.  There was only one deal this week for a total of $500mm making it by far the slowest issuance week of the year.  The month of May has also been very underwhelming relative to expectations with just $73.85bln in issuance, well below the average estimate of $135bln.  There are two factors at play here, and they are entirely different in nature.  Issuance this week was slow merely because of the time of year –companies are often hesitant to issue ahead of a long weekend, especially with an early close on Friday, as it is typically perceived as a slower time in the capital markets and company treasury departments and CFOs worry that demand may not be as robust as they would like.  Companies certainly did not choose to shelve deals this week because of the market tone as the market was quite strong.  The monthly miss versus expectations was most certainly due to the volatility that we experienced in the weeks preceding this one.  There were many days of wider spreads and bloodletting in equities that would have led issuers and their bankers to simply “wait for a better day” to bring anticipated deals.  Projections for next week suggest $25-$30bln of new issuance.  There remain several very large deals waiting in the wings related to M&A so we could see some of those issuers look to print in the coming weeks if the market tone remains positive.

Investment grade flows have shown signs of stabilization the past two weeks.  Per data compiled by Wells Fargo, flows continued their negative trend but it was once again a very modest outflow.  Outflows for the week of May 19–25 were -$1.1bln which brings the year-to-date total to -$68.3bln.  Combined redemptions the past two weeks were the smallest over any two week period dating back to March according to Wells.

Credit spreads drifted wider this week while major equity indices posted their 7^th consecutive week of losses.  The OAS on the Bloomberg US Corporate Bond Index closed Friday, the 20^th of May at 149 after having closed the week prior at 141.  This marked the widest close for the index in 2022.  The 10yr Treasury closed the week lower, at 2.78% after closing the week prior at 2.92%.  The Investment Grade Corporate Index had a negative YTD total return of -12.99% through Friday while the YTD S&P500 Index return was -17.67% and the Nasdaq Composite Index return was -27.19%.

New issue volume showed a slight surprise to the upside during the week as $33.4bln of new debt exceeded the consensus estimate of $30bln. Projections for next week suggest $25-$30bln of new issuance.

Per data compiled by Wells Fargo, flows for investment grade were negative on the week.  Outflows for the week of May 12–19 were -$1.2bln which brings the year-to-date total to -$67.2bln.  This was smallest weekly redemption in 8 weeks according to Wells.

It was another volatile week for risk assets, especially equities.  The OAS on the Bloomberg US Corporate Bond Index closed Thursday, the 12^th of May at 141 after having closed the week prior at 134.  The 10yr Treasury closed the previous week at 3.13% and it is trading at 2.91% as we go to print late Friday morning.  The Investment Grade Corporate Index had a negative YTD total return of -12.90% through Thursday while the YTD S&P500 Index return was -17.11% and the Nasdaq Composite Index return was -27.32%.

Key economic data hit the tape this week with CPI on Wednesday morning and PPI on Thursday.  CPI moderated from the previous month on a y/y basis but the headline number did surprise to the upside, as inflation did not slow as much as economists had predicted.  This likely keeps the Fed on its tightening path at its June meeting where the market is looking for a 50bps increase in Fed Funds.  PPI painted a picture of moderating inflation as the data showed that US producer prices increased more slowly in April than they did in March.

Volume in the investment grade primary market was less than investor expectations as $21.7bln in new debt was brought to market.  There were multiple issuers that stood down during the week preferring to wait for calmer market conditions.  Projections for next week are calling for $30bln of new issuance.

Per data compiled by Wells Fargo, flows for investment grade were negative on the week.  Outflows for the week of May 5–11 were -$7.7bln which brings the year-to-date total to -$60.1bln.  This was the largest weekly outflow from US IG in more than two years according to Wells.

One word can aptly describe this week: volatile.  The OAS on the Bloomberg US Corporate Bond Index closed Thursday, the 5^th of May at 134 after having closed the week prior at 135.  Although the spread on the index was slightly tighter the performance effect was offset by higher Treasury yields.  The 10yr Treasury closed the previous week at 2.93% and it is trading at 3.14% as we go to print on Friday afternoon.  The Investment Grade Corporate Index had a negative YTD total return of -13.39% through Thursday while the YTD S&P500 Index return was -12.59% and the Nasdaq Composite Index return was -21.27%.

The Fed delivered a 50bp hike of the Fed Funds Rate on Wednesday afternoon which was promptly followed by an aggressive move higher in equities and a rally in Treasuries.  Credit spreads also moved tighter on the back of the FOMC.  These moves were somewhat puzzling to us but market prognosticators were quick to explain them as a reaction to Chairman Powell’s reluctance to pound the table on a 75bp rate hike.  Powell’s commentary was measured and led observers to believe that the Fed would not be hawkish at all costs and that the data would dictate their actions at subsequent meetings.  The grab for risk dissipated quickly Thursday morning with a big reversal in risk as equities gave back all of Wednesday’s gains and then some.  Friday too has been a relatively weak day for risk.  Equities have bled lower while Treasuries have sold off on the back of a relatively unsurprising jobs report.  Risk markets are not responding well to uncertainty and that has led to a roller coaster ride of volatility.  Meanwhile, in the investment grade credit markets, yields sit at their highest levels in more than a decade and credit conditions remain strong –we feel that valuations are compelling at the moment.

Volume in the investment grade primary market managed to chug along and land right in the middle of the $20-25bln estimate with $22.6bln in new debt having been brought to market during the week.  In our view this speaks to the resiliency of investment grade credit as it was pretty ugly out there yet borrowers were able to price new debt with reasonable concessions.

Per data compiled by Wells Fargo, flows for investment grade were negative on the week.  Outflows for the week of April 28–May 4 were -$5.3bln which brings the year-to-date total to -$52.8bln.

It was an ugly week for risk assets.  The OAS on the Bloomberg US Corporate Bond Index closed the week of April 29^th at 135 after having closed the week prior at 132.  The month of April is one that investors would like to forget; it was historically bad for credit and stocks were down substantially.  All eyes will be on the Federal Reserve next Wednesday.  The market is pricing in a 50bps increase in the Fed Funds rate and is awaiting more details on balance sheet run-off.  The Investment Grade Corporate Index had a negative YTD total return of -12.73% through the end of the week while the YTD S&P500 Index return was -12.92% and the Nasdaq Composite Index return was -21.2%.

Volume in the primary market was underwhelming during the week and finished just under $9bln relative to estimates that were in the neighborhood of $25bln.  Per Bloomberg, this boosted the monthly total for April to $107.2bln.  Historically, May is a seasonally busy month and estimates are calling for $125-150bln of monthly supply.   While investor demand for high quality issuers has remained strong, we detect a sentiment of caution among borrowers as their funding costs are higher than they have been in several years so it will be interesting to see if May volume can keep pace with expectations.  There are some large bond deals waiting in the wings related to M&A that could come to market in May and it will also be interesting to see if investors demand higher new issue concessions from those borrowers who in some cases have to float large amounts of new debt.

Per data compiled by Wells Fargo, flows for investment grade were negative on the week.  Outflows for the week of April 21–27 were -$2.4bln which brings the year-to-date total to -$47.5bln.

Spreads drifted wider throughout the week and the tape is weak on Friday afternoon for credit and equites as we go to print.  The OAS on the Bloomberg US Corporate Bond Index closed at 128 on Thursday, April 21, after having closed the week prior at 121.  On Thursday, Federal Reserve Chairman Jerome Powell delivered a hawkish message that sent equities lower and credit spreads wider.  Geopolitical tensions and a humanitarian crisis Ukraine also continue to weigh on sentiment.  The Investment Grade Corporate Index had a negative YTD total return of -12% through Thursday.  The YTD S&P500 Index return was -7.4% and the Nasdaq Composite Index return was -15.6%.  The yield to worst for the Corporate Index is now 4.21%, closing in on the high of 4.57% that occurred during the early days of the pandemic in March of 2020.

The primary market was very busy this week with $55 billion in new debt having been brought to market.  Financials led the way with $33bln in issuance from money center banks.  Year-to-date issuance has now topped $551bln, slightly ahead of 2021’s pace.

Per data compiled by Wells Fargo, flows for investment grade were negative on the week.  Outflows for the week of April 14–20 were -$2.8bln which brings the year-to-date total to -$45.1bln.