Author: Josh Adams - Portfolio Manager

Spreads regained some ground this week and are looking to finish several basis points tighter.  The OAS on the Blomberg Barclays Corporate Index closed Thursday at 96 after closing the week prior at 98.  Treasuries were unusually volatile again, with the 10yr having a range of over 10 basis points during the week.  The FOMC played a large part in driving news flow during the week with a rate decision on Wednesday and an announcement on Friday that they would allow some bank regulatory exemptions to expire at month end.  On Wednesday, Chairman Powell repeated promises to hold the Fed Funds rate at a low level in an effort to keep the economic recovery moving in the right direction.  Additionally the Fed indicated that it would not budge if inflation breached its 2% target during the year, saying it would view pockets of rising prices as transitory in nature.  The 10yr Treasury is wrapped around 1.7% as we go to print on Friday afternoon, which is near the highest level of the year.  Through Thursday, the corporate index had posted a year-to-date total return of -5.47% and an excess return over the same time period of +0.35%.

Issuance was strong again this week and will total about $30bln when it is all said and done.  Not even the opening day of the NCAA Basketball Tournament could stop things, as a couple of issuers are bringing new deals on Friday.  According to data compiled by Bloomberg, $383bln of new debt has been issued year-to-date, with a pace of +35% relative to last year.

Per data compiled by Wells Fargo, inflows into investment grade credit for the week of March 11-17 were +$3.6bln which brings the year-to-date total to +$103bln.

Spreads will finish the week comfortably wide of the year-to-date tights that we saw 2 weeks ago.  It was a volatile week for rates and spreads and the OAS on the Bloomberg Barclays Corporate Index closed at 92 on Thursday evening after ending the week prior at 90.  Treasuries were relatively calm the first two days of the week before inching higher throughout mid-week as Fed Chairman Powell delivered some dovish remarks on Thursday afternoon.  The 10yr Treasury, which traded as low as 1.39% on Monday, had risen to 1.57% into the Thursday close.  Friday morning saw the release of an employment report that topped expectations, sending the 10yr even higher, up to 1.62%, but the sell off in rates quickly faded and most of Friday afternoon was been spent wrapped around 1.55%. Through Thursday, the corporate index had posted a year-to-date total return of -4.21% and an excess return over the same time period of +0.50%.

The high grade primary market had a huge week as 45 issuers defied volatility bringing more than $65bln in new debt.  Next week also looks like it could be a big number as inflows into the investment grade market have created good demand and issuers have been happy to oblige.

Per data compiled by Wells Fargo, inflows into investment grade credit for the week of February 25-March 3 were +$4.9bln which brings the year-to-date total to +$82bln.

As we move forward, it is now all quiet on the Fed front as the blackout period on public comment is now in effect.  The Fed meets March 16-17 so the market will have an interesting test over the next 2 weeks as it must interpret data on its own as opposed to parsing Fed-speak.

Spreads continued their slow burn this week, gradually inching tighter.  The OAS on the Bloomberg Barclays Corporate Index closed at 88 on Thursday evening after ending the week prior at 92.  Treasuries are at their highest levels of the year for the second consecutive week.  The 10yr Treasury closed last week at 1.21% and it is trading at 1.35% as we go to print this Friday afternoon.  Through Thursday, the corporate index had posted a year-to-date total return of -2.07% and an excess return over the same time period of +0.83%.

The high grade primary market was light during the holiday shortened week with only $14bln in new issuance.  Concensus estimates for next week are calling for $30-$40bln in new issuance, according to Bloomberg surveillance.

Per data compiled by Wells Fargo, inflows into investment grade credit for the week of February 11-17 were +$7.6bln which brings the year-to-date total to +$73bln.

Price action in Treasuries the past two weeks has been wrapped around investor views of stimulus and inflation.  As vaccinations increase and infections decrease, global economies can be expected to exit their slumber.  We think there is a consensus among market participants that inflation is likely to increase throughout 2021 and into 2022 but we are of the view that there is much uncertainty regarding the degree of the relfation trade.  There are numerous areas of the economy that could take years to recover while there are some sectors that have already recovered and those that will bounce back even stronger.  Are sustainable broad based price increases across the vast majority of the economy possible?  Anything is possible, but we would argue that an extraordinarily robust recovery over a short time period is unlikely – but let’s assume this does come to fruition.  While the Fed has said it would tolerate temporary inflation above its targeted level, if it were to view this as something more than fleeting, and if it were to view the economy as “overheating” then it could well accelerate the timeline for raising the Fed Funds Rate.  A higher Fed Funds Rate typically leads to tighter financial conditions and slowing growth, which would put a brake on any reflation trade.  The point is that yes, we think reflation is likely, especially in certain sectors of the economy.  But even if the domestic economy were to recover much more quickly than expected, we are skeptical that the Fed will allow significant levels of inflation without Fed Policy intervention.

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.

Spreads initially ripped tighter on Monday of this week before giving back some gains, but it looks like the index will still end the week tighter, or at worst, unchanged.  The OAS on the Bloomberg Barclays Corporate Index closed at 92 on Thursday evening after ending the week prior at 93.  Treasuries are at their highest levels of the year across the board and curves continue to steepen.  The 10yr Treasury closed last week at 1.16% and it is hovering around 1.19% as we go to print on this Friday morning.  Through Thursday, the corporate index had posted a year-to-date total return of -1.45% and an excess return over the same time period of +0.49%.

The high grade primary market was more subdued this week with only $16bln in new issuance.  Next week, too, may see lower volumes with the market closed for Presidents Day on Monday, but midway through February we are on pace for $120bln of issuance which is quite a strong number.

According to data compiled by Wells Fargo, inflows into investment grade credit for the week of February 4-10 were +$2.1bln which brings the year-to-date total to +$40bln.

In our recent discussions with some of our clients, the topic of inflation and rising rates has been coming up with increasing frequency.  We have long warned of the folly of trying to predict moves in interest rates.  That is one of the reasons that we always position our portfolio in intermediate maturities rather than attempting to tactically switch between long and short maturities based on our guess as to the direction of rates.  To put recent rate moves into context, the 10yr Treasury closed at 0.51% on August 4, 2020 and it has more than doubled since then, closing at 1.18% on February 11, 2021.  If we look at returns for the Corporate Index over this same time frame you may be surprised to learn that the total return for the index was only modestly negative at -0.38% total return; and you would be hard pressed to cherry pick a worse timeframe for returns from a rate presepective!  The reason that corporate credit returns can be relatively resilient in the face of rising rates is due to the power of spread compression and coupon income.  Over that same period the index saw its spread compress from 131 to 92 and then investors also earned a coupon from corporate credit that was greater than the coupon earned from investing in duration matched Treasuries.  Could rates continue to go higher from here?  Yes of course they could, just as they could go lower.  But we would be surprised to see them go materially higher in the near term as our expectations for inflation remain relatively subdued relative to what seems to be a growing market concensus.  We will explore some of the reasons why inflation is not necessarily something investors should bank on in our future weekly commentaries.  Thank you for your interest and continued support.

Price action in the corporate bond market this week would best be described as “grabby” with spreads consistently grinding tighter throughout the week. Spreads were wider the week before last but they have since reclaimed that ground that was given up. The Bloomberg Barclays US Corporate Index closed on Thursday February 4 at 94 after closing the week prior at 97. Treasuries are higher across the board this week and curves are at their steepest levels of the year. The 10yr Treasury closed last week at 1.065% and it is 8 basis points higher as we go to print on this Friday morning. Through Thursday, the corporate index had posted a year-to-date total return of -1.61% and an excess return over the same time period of +0.27%.

The high grade primary market saw solid volumes during the week on the back of a jumbo $14bln print from Apple. Over $45bln priced during the week. Year-to-date issuance stands at $172.8 billion. Investor demand for new issuance remains quite strong as the U.S. corporate bond market is one of the last bastions for positive nominal yields globally.

According to data compiled by Wells Fargo, inflows into investment grade credit for the week of January 28-February 3 were +$7.9bln which brings the year-to-date total to +$37.9bln.

Spreads are looking likely to finish the holiday shortened week with little change.  The Bloomberg Barclays US Corporate Index closed on Thursday January 21 at 94 after closing the week prior at 94.  Treasuries have hardly moved this week and are currently less than 2 basis points lower since last Friday.  Through Thursday, the corporate index had posted a year-to-date total return of -1.22%.

The high grade primary market saw reasonable volume during the week that was right in line with concensus expectations.  Over $25bln priced during the week.  Year-to-date issuance stands at $100.3 billion.

According to data compiled by Wells Fargo, inflows into investment grade credit for the week of January 14-20 were +$7.7bln which brings the year-to-date total to +$22.7bln.

Spreads will finish the week unchanged after a minor bout of mid-week volatility that pushed spreads wider for a day.  Through the Thursday close, the OAS on the Bloomberg Barclays Corporate Index was 96, which is the same level that it closed to end 2020.  Treasury rates stole the headlines from spreads this week and are higher across the board, with the 10yr up 19 basis points week over week.  The sell-off in Treasuries began ahead of the Georgia special election and accelerated after the results, as the market began to price the expectation of more stimulus and Treasury supply.  Interestingly, rates were even able to shrug off a woeful December jobs report that showed the loss of -140k jobs during the month versus the concensus estimate for an addition of +50k.  We remain concerned about the health of the labor market, elevated unemployment and its impact on the economy’s ability to grow.

The high grade primary market was back in business this week with a strong start to the year as issuers borrowed $50bln.  It will be interesting to monitor new issue supply as 2021 progresses.  There are expectations for less supply but will this hold true?  In our view it is really a question of the economy and how quickly things get back to “normal.”  If things go swimmingly, then we would expect less supply but if re-opening takes longer than expected then that would be a case for more supply as companies that are more impacted by the pandemic may need to continue to tap the new issue market for balance sheet liquidity.

According to data compiled by Wells Fargo, inflows into investment grade credit for the week of December 31-January 6 were +$8.4bln.

Spreads will finish the week meaningfully tighter.  Treasuries have also rallied this week which has led to positive performance across the fixed income landscape due to the one-two punch of tighter spreads and lower rates.  The Bloomberg Barclays US Corporate Index closed on Thursday November 19 at 109 after closing the week prior at 114.  Through Thursday, the corporate index posted a year-to-date total return of +8.77%.

The high grade primary market was active again with $40 billion of new debt having been priced this week across 35 deals according to data compiled by Bloomberg.  Next week is typically one of the slowest of the year in the bond markets, but if 2020 has anything to say about that it could be busier than expected.  The market is closed for Thanksgiving and then closes early at 2pm on Friday so any primary market activity will be on Monday or Tuesday of next week while the latter half of the week is likely to see little to no activity.   Monthly issuance for November has now eclipsed $83 billion while the yearly total keeps adding to its record size, now in excess of $1.7 trillion.

According to data compiled by Wells Fargo, inflows into investment grade credit for the week of November 12-18 were +$6.8bln which brings the year-to-date total to +$257.8bln.

Spreads are all set to finish the week tighter.  Risk assets fared well across the board this week on the back of positive vaccine news.  The Bloomberg Barclays US Corporate Index closed on Thursday November 12 at 115 after closing the week prior at 117.  Through Thursday, the corporate index posted a year-to-date total return of +7.71%.

The high grade primary market was fairly active given the Veterans Day holiday in the middle of the week.  Jumbo deals from Verizon and Bristol-Myers pushed the weekly issuance total north of $41bln.  Next week will be the last chance for issuers to access the market before things slow down ahead of Thanksgiving.

According to data compiled by Wells Fargo, inflows into investment grade credit for the week of November 5-11 were +$5.4bln which brings the year-to-date total to +$240.2bln.