Josh Adams – Portfolio Manager – Page 4 – Cincinnati Asset Management

19 Apr 2024

Insight, Investment Grade Weekly Josh Adams - Portfolio Manager 0 comment

CAM Investment Grade Weekly Insights

Spreads finally took a breather this week as the market moved modestly wider throughout the period. The Bloomberg US Corporate Bond Index closed at 92 on Thursday April 18 after closing the week prior at 89. The 10yr Treasury yield is higher again this week and is trading at 4.63% this Friday morning after closing last week at 4.52%. Higher Treasury yields have been a headwind for IG returns so far this year –through Thursday, the index YTD total return was -3.07% while the yield-to-maturity for the benchmark was 5.73% relative to its 5-year average of 3.65%.

Economics

Things got off to a hot start right away on Monday morning as March retail sales data beat expectations in a big way. Some economists have argued that an early Easter may have pulled some spending forward from April into March but there is no denying that it was a very solid number and yet another data point showing a resilient economy. Federal Reserve chairman Jerome Powell may finally be coming around to the realization that the Fed will have difficulty justifying near term rate cuts. At an economic forum on Tuesday, Powell commented on rate cuts: “The recent data have clearly not given us greater confidence and indicate that it is likely to take longer than expected to achieve that confidence.” Not all the data was rosy this week as Thursday’s existing home sales release showed a 4.3% decline from February, the biggest monthly drop in over a year. Additionally, higher Treasury yields caused the average rate on the standard 30-year fixed rate mortgage to surge to 7.1%. Next week we get plenty of data with the grand finale on Friday morning when Core PCE will hit the tape.

Issuance

Issuance was on the screws relative to estimates on the week as volume came in at just over $31bln, although there was not much diversity with the financial sector accounting for 90% of that number. Syndicate desks are looking for $20-$25bln of new bonds next week. Year-to-date issuance stands at $605.2bln, up +42% relative to 2023. It “feels” like new issue concessions showed some improvement on the week but the reality is that it has not yet shown up in the numbers. Even still, data did show that 66% of deals priced this week rallied in the secondary market.

Flows

According to LSEG Lipper, for the week ended April 17, investment-grade bond funds reported a net inflow of +$170mm. This was the 18^th consecutive weekly inflow for IG funds. YTD flows into IG stand at +$33.5bln.

12 Apr 2024

Insight, Investment Grade Weekly Josh Adams - Portfolio Manager 0 comment

CAM Investment Grade Weekly Insights

Spreads inched tighter during the week with the Bloomberg US Corporate Bond Index at its narrowest level of the year. The index closed at 87 on Thursday April 11 after having closed the week prior at 89. The 10yr is trading at 4.52% this Friday morning after closing last week at 4.40%. Through Thursday, the index YTD total return was -2.40% while the yield-to-maturity for the benchmark was 5.62% relative to its 5-year average of 3.65%.

Economics

It was an active week for economic data with the highlight of the week being another firmer than anticipated CPI print on Wednesday. This caused a sell-off in Treasuries with the 2-year leading the way as its yield finished the day 23bps higher. At the end of Wednesday, rates across the board were at the highest levels of 2024 but have since come off the highs and the entire curve is rallying to the tune of about 10bps as we go to print this Friday morning. These short term moves should not distract corporate bond investors from the bigger picture: this is an asset class that is well poised to deliver solid returns in the future, in our opinion. This entire year we have been saying that we felt that the bar was quite high for the Fed to begin cutting rates because the economy was simply too strong and the economic data too good. We were quite puzzled in January when interest rate futures were pricing 6 or 7 cuts despite a Fed dot plot that indicated 3 cuts at the median. The market has now come around to our view with futures pricing just shy of 2 cuts in 2024 as of this Friday morning. It is clear from its messaging that the Fed wants to cut and we know it is coming at some point. We believe that cuts would be a positive for our strategy as we think that it would be an important catalyst for Treasury curves to regain some upward positive slope. The Fed will cut when the data that it depends on will allow it to cut. It is as simple as that. In the interim, we believe that this backup in rates has created an opportunity for long term credit investors. We would not be surprised if we were to look back a year or two from now and long for the yields that are available to corporate credit investors today.

Issuance

Issuance was in-line with estimates on the week as companies priced $20.2bln of new debt. Next week dealers are estimating $30bln of new supply with banks leading the way as they report earnings and exit their blackout periods. Year-to-date issuance stands at $573.7bln, up 39% relative to 2023.

Flows

According to LSEG Lipper, for the week ended April 10, investment-grade bond funds reported a net inflow of +$3.2bln. This was the 17^th consecutive weekly inflow for IG funds. YTD flows into IG stand at +$33.3bln.

10 Apr 2024

Insight, Investment Grade Quarterly Josh Adams - Portfolio Manager 0 comment

2024 Q1 Investment Grade Quarterly

Click here to read the Spanish version / Haga clic aquí para leer la versión en español

The first quarter of the year saw enthusiastic investor demand for investment grade corporate bonds and tighter credit spreads. Spread performance was offset by Treasury yields that drifted higher throughout the quarter as economic data and Federal Reserve messaging made it increasingly clear that the Fed would be more deliberate with rate-cuts than what the market had anticipated at the beginning of 2024. Taking it all together, it was a modestly negative quarter of total returns for IG credit but this is an asset class that best lends itself to a longer term view. We believe that the current environment presents an opportunity. Elevated Treasury yields and strong credit metrics across the IG universe have the potential to generate attractive risk-adjusted returns for IG credit investors over a longer time horizon.

First Quarter Review

The option adjusted spread (OAS) on the Bloomberg US Corporate Bond Index opened the year at 99 and it briefly traded wider during the first 7 trading days of the year before the mood improved to the point that it would never again trade cheap to its opening level for the duration of the first quarter. The index traded as tight as 88 near the end of March, its narrowest level since November 2021, before finishing the quarter at an OAS of 90. Perhaps the most surprising aspect of this movement toward tighter spreads is that it occurred amid a record breaking deluge of new issue supply as borrowers printed $529 billion in new IG-rated corporate debt during the quarter.ⁱ

Sometimes a large amount of new issuance within a small window of time can have the effect of pushing credit spreads wider as investors sell existing holdings to make room for new issue allocations. For example, in 2020 and 2022, when 1Q new issue supply exceeded $450mm, it was accompanied by a meaningful move wider in credit spreads. However, that was not the case in 2024 as investor demand was robust and IG fund flows were solidly positive which was supportive of both tighter spreads and a robust market for new issuance.

Moving on to Treasury yields, they were higher across the board in the first period of the year which sapped some momentum from total returns.

Although we don’t like to see rates move higher because of the short term headwinds it creates for performance, we think that higher yields present an opportunity for investors to be compensated for taking intermediate duration risk. Yields remain elevated relative to the recent past –the yield to maturity (YTM) for the Corporate Index closed the first quarter at 5.30% which was 180 basis points higher than its average YTM of 3.50% over the past 10 years.

The Market Fought, but the Fed Always Wins

In our January commentary we wrote that we believed that the bar was high for near term rate cuts and our view remains the same. At the beginning of the year Fed Funds Futures were implying seven 25bp rate cuts in 2024 for a total of 1.75%. Investors speculated that the first cut would occur at the March meeting with an additional cut at every meeting thereafter (the FOMC holds 8 regularly scheduled meetings per year).ⁱⁱ This is what interest rate futures were pricing in early January despite the fact that in December the Fed released its “Summary of Economic Projections” (SEP) which included the dot plot showing just 0.75% worth of rate cuts in 2024. To be fair, the Fed bears some responsibility for the market exuberance in January thanks to its dovish messaging on the heels of the December FOMC meeting.

As the first quarter wore on, the market slowly came around to the idea that the Fed may tread lightly, decreasing its policy rate more cautiously than expected. As it does every three months, the Fed issued an updated SEP at its March 2024 meeting which was slightly more hawkish than the December release but it still showed 0.75% worth of rate cuts in 2024. At the end of the first quarter, Fed Funds Futures mirrored the most recent March dot plot implying a 56.9% chance of a cut at the June meeting with 2 additional cuts to follow at the September and December meetings.ⁱⁱⁱ This is a much more realistic view of what is likely to occur in our opinion. Without some kind of exogenous shock, or in the absence of data that shows that the economy is significantly slowing, we expect that the Fed will be patient as it looks to ease restrictive policy. Although it is not our base case, we think that there is a reasonable chance that the Fed may not cut at all in 2024. We think that the most likely outcome is that the Fed will deliver one or two 25bp cuts in the second half of the year. The Fed faces a difficult conundrum –it cannot move too quickly in the face of a resilient U.S. economy that is still creating jobs; but the longer it keeps rates at elevated levels, the greater the probability that it tumbles the economy into some type of recession. We have a high degree of conviction that the Fed would very much like to decrease the policy rate as soon as it possibly can but we lack confidence that the data will allow them to do so. Therefore, we believe that a modest recession before the end of 2025 is more likely than not due to an extended version of “higher for longer” monetary policy.

Value of Active Management

We believe that a Fed that is biased toward decreasing its policy rate is a positive for our strategy. We are an intermediate manager with the bulk of our portfolio positioned in bonds that mature in 5 to 10 years. Our base case is the following scenario: The Federal Funds rate decreases over time while Treasuries that range in maturity from 2 to 5 years decrease in concert. At the same time intermediate Treasuries that mature in 5 to 10 years move back toward a normalized upward sloping level. This scenario would allow the yield curve to regain some of its classical steepness and CAM’s portfolio would benefit from the “roll-down” effect as bonds move down the yield curve, inching closer to maturity with each passing day.

The above chart goes back 20 years from the end of the first quarter of 2024. As you can see, the 5/10 Treasury curve is almost always positive and it has averaged 56.6bps of steepness over that time period relative to its closing level of -1bp at the end of March. If a 10-year bond is purchased with the intention of holding it for 5 years before selling, and the 5/10 Treasury curve averages 50bps over that period, the bond will yield 10bps of compensation annually in the form of roll-down. Curves are not static and in our opinion are best understood in terms of averages.

When discussing IG credit it is important to remember that there are two curves an investor should care about. There is the aforementioned Treasury curve and then there is the corporate credit curve that trades on top of Treasuries. This is the extra compensation that an investor receives for taking the additional credit risk of owning a corporate bond over a Treasury bond. Like Treasury curves, corporate credit curves are ever evolving and changing all of the time, thus they can present opportunity for the active investor. Unlike the Treasury curve, which can invert, the corporate credit curve is almost never inverted, though it can be inverted for specific bond issuers in spots from time to time due to credit conditions or technical factors. Active managers will eventually take advantage of these inversions until they no longer exist.

At the end of the first quarter the typical corporate credit curve for the A-rated companies that we are looking at for our portfolios ranged from 20 to 30 basis points with outliers on either side of that.^iv So if we pick a midpoint of 25bps then that means a 5-year bond of an issuer that trades at a spread of 50/5yr could expect to see the 10-year bond for that same issuer trade at a spread of 75/10yr. If a 10-year bond were purchased with the expectation of selling it at the 5-year mark, it would yield 5bps of roll-down credit spread compression for each year it is held. This is just the compensation afforded by the corporate credit curve. In normalized environments with an upward sloping Treasury curve, roll-down from the 5/10 TSY curve would provide additional benefits on top of compensation received from the credit curve. This one-two punch can amplify total returns, benefiting investors during periods of curve steepness.

As an active manager we are always looking for ways to maximize client positioning along the credit and Treasury curves. Sometimes this means we will favor shorter maturities within that 5-10yr band and other times we will be on the longer end of that range. In some environments, like the one we are in currently, the economics will dictate that we hold existing bonds longer, until they have 3 or 4 years left to maturity in order to maximize the effectiveness of a sale-extension trade. Although we sell 98%+ of our holdings prior to maturity, occasionally the bond math will indicate that we are better off holding a bond to maturity than we would be if we sold it and bought something else. As an active manager we are focused on the bond market all day every day constantly evaluating opportunities and looking to maximize the value of each individual client holding.

Creditworthiness: Strong to Quite Strong

We pride ourselves on our bottom up research process and believe it is one of the most important attributes that we bring to the table as a manager. We cannot control the direction of interest rates but we can exhibit a great deal of control over the credit worthiness of the bonds of the companies that we include in client portfolios. Investment grade companies are rated IG for a reason –yes, IG-rated companies do sometimes default on their debt obligations, but it is usually a multi-year process of credit degradation and a prudent manager will sell before the worst case of a default comes to fruition. In other words, when looking at investment grade credit, there are not many bad bonds, but there are a lot of bad prices. There are many bonds in the IG universe that are simply priced too rich and that do not offer adequate compensation per unit of risk. We always seek to populate client portfolios with bonds that are appropriately valued in an effort to reduce volatility and limit the prospect of spread widening during difficult market periods.

Although we are focused on individual credit analysis, looking at credit metrics for the IG-universe as a whole is instructive when we are trying to illustrate the current health of the overall market and it also helps us judge the relative value of investment opportunities. At the end of the 4^th quarter of 2023, credit metrics across IG were strong.^* EBITDA margins in particular continued to look impressive relative to history and are near all-time highs while EBITDA growth turned back to positive after a quarter of declines.

Net debt leverage for the non-financial IG index has been stable for 5 consecutive quarters and has improved since the first half of 2022. The only major credit metric that has declined in recent quarters is interest coverage and that is largely because companies have been issuing new debt with higher coupons than the debt that has been maturing.^v In the first quarter of 2024, the average coupon of IG new issues was 5.33% which was 202bp higher than the average coupon of maturing bonds which was 3.31%.^vi For context, compare that to 7.24% which was the average 30yr fixed mortgage rate for a residential buyer at the end of the first quarter: the cost of capital for IG-rated companies looks very reasonable.^vii Simply put, investors do not need to take a lot of credit risk or interest rate risk to generate healthy returns in IG-rated credit –aggregate credit metrics are at healthy levels and the index yield is >5%.

Looking Ahead

The last several years have been a historic time in the credit markets. From March 2020 until March 2022 we experienced arguably the easiest Fed policy in history with 0% Fed Funds accompanied with unprecedented economic stimulus. Then the Fed increased its policy rate 11 times in 18 months to its current range of 5.25%-5.5% –the fastest pace of tightening in over 40 years.^viii We are at the precipice of history once again as the Fed is tasked with finishing the war against inflation while restoring its policy rate to a more normative level. It is an environment of uncertainty –where will the economy go from here? We will continue to focus on our bread and butter and that is populating client portfolios with the bonds of companies that are well poised to navigate a variety of economic environments. We thank you for your interest and continued partnership as we navigate the balance of 2024.

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.

The information provided in this report should not be considered a recommendation to purchase or sell any particular security. There is no assurance that any securities discussed herein will remain in an account’s portfolio at the time you receive this report or that securities sold have not been repurchased. The securities discussed do not represent an account’s entire portfolio and in the aggregate may represent only a small percentage of an account’s portfolio holdings. It should not be assumed that any of the securities transactions or holdings discussed were or will prove to be profitable, or that the investment decisions we make in the future will be profitable or will equal the investment performance of the securities discussed herein. As part of educating clients about CAM’s strategy we may include references to historical rates and spreads. Hypothetical examples referencing the level of, or changes to, rates and spreads are for illustrative and educational purposes only. They are not intended to represent the performance of any particular portfolio or security, nor do they include the impact of fees and expenses. They also do not take into consideration all market and economic conditions that influence our decision-making. Therefore, client accounts may or may not experience scenarios similar to those referenced herein.

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/

i Bloomberg, March 28 2024 “High-Grade Bond Sales on Easter Pause After Record First Quarter”

ii Bloomberg WIRP, December 29 2023 “Fed Funds Futures”

iii Bloomberg WIRP, March 29 2024 “Fed Funds Futures”

iv Raymond James & Associates, March 28 2024 “Fixed Income Spreads”

v Barclays Bank PLC, March 13 2024 “US Investment Grade Credit Metrics, Q24 Update: No Concerns”

vi J.P. Morgan, April 3 2024 “US High Grade Corporate Bond Issuance Review”

vii Bloomberg ILM3NAVG Index, March 28 2024 “Bankrate.com US Home Mortgage 30 Year Fixed National Avg”

viii CNBC, December 13 2023 “The Federal Reserve’s period of rate hikes may be over. Here’s why consumers are still reeling”

22 Mar 2024

Insight, Investment Grade Weekly Josh Adams - Portfolio Manager 0 comment

CAM Investment Grade Weekly Insights

Spreads stuck to a tight range this week and are looking to finish the period at the narrowest levels of 2024. The Bloomberg US Corporate Bond Index closed at 88 on Thursday March 21 after having closed the week prior at 89. The 10yr is trading at 4.22% this Friday morning after closing last week at 4.31%. Through Thursday, the Investment Grade Corporate Index YTD total return was -1.00%. The story remains the same: spreads are tight but yields are elevated. The yield to maturity for the Bloomberg US Corporate Bond index as of Thursday evening was 5.34%.

Economics

It was a light week for economic data but an extremely busy week for central banks throughout the globe. There were rate decisions from Australia, the BOJ, the BOE and of course the FOMC, among others. Chairman Powell walked a tightrope in his press conference and the market interpreted the Fed release as slightly dovish. The Fed made it clear that rate cuts are still on the agenda with its updated dot projections. The market is currently coalescing around 3 cuts for a total of 75bps beginning at the June meeting. This is far from certain in our view and only time (and ensuing economic data) will tell. As of this morning, interest rate futures are implying a 65% chance of a cut in June.

Issuance

Issuance was in-line with estimates on the week as companies priced more than $27bln of new debt. For the year, the torrid pace of issuance has now officially passed the half trillion mark, with 2024 setting a new record for how quickly $500bln was breached. Next week dealers are estimating $20bln of new supply. This number is certainly achievable, especially if Monday is busy, but we would not be surprised if the issuance tally is underwhelming relative to expectations. It is typically a seasonally slow week and the bond market closes early on Friday leaving Monday and Tuesday as the most favorable days for new issue prints.

Flows

According to LSEG Lipper, for the week ended March 20, investment-grade bond funds reported a net inflow of +$1.4bln. This was the 14^th consecutive weekly inflow for IG funds. YTD flows into IG stand at +$23.9bln.

15 Mar 2024

Insight, Investment Grade Weekly Josh Adams - Portfolio Manager 0 comment

CAM Investment Grade Weekly Insights

Spreads moved tighter throughout the week. The Bloomberg US Corporate Bond Index closed at 91 on Thursday March 15 after having closed the week prior at 95. The 10yr is trading at 4.31% this Friday morning after closing last week at 4.07%. Through Thursday, the Investment Grade Corporate Index YTD total return was -1.40%. Although spreads are near the tight end of their historical range, yields remain significantly higher than they have been in the recent past and meaningfully higher than they have been for most of the past two decades. The yield to maturity for the Bloomberg US Corporate Bond index as of Thursday evening was 5.4%, relative to its 10 and 20-year averages of 3.49% and 4.15%, respectively.

Economics

It was a mixed week for economic data but, overall, the economy remains resilient and the job market hasn’t yet lost its luster. On Tuesday, the core CPI gauge exceeded expectations for the second straight month. Headline CPI was up +3.2% year over year in February, slightly ahead of the +3.1% recorded for January. On Thursday, the data had something for both Hawks and Doves. PPI came in hot with pries paid during the month of February exceeding estimates while an employment report showed that fewer people were applying for jobless benefits. On the other side of the coin, tepid February retail sales data showed that consumer spending slowed relative to estimates. Market expectations have continued to shift –last week at this time interest rate futures were showing that investors were looking for 3 or 4 rate cuts in 2024 while this week the consensus has shifted more toward only 3 cuts. Next week is extremely light on the data front with the exception of the main event on Wednesday as all eyes will be on the FOMC rate decision. The Fed will also release its first update to the vaunted dot plot since December of 2023.

Issuance

In was another solid week of issuance as companies priced over $37bln of new debt, in line with sell side estimates. 2024 continues to be the busiest year in the history of the investment grade primary market with supply running at ~$476bln YTD, which is +36% higher than 2023’s pace. Next week is expected to see supply slow slightly with dealers estimating $25-$30bln of new supply.

Flows

According to LSEG Lipper, for the week ended March 13, investment-grade bond funds reported a net inflow of +$1.61bln. This was the thirteenth consecutive weekly inflow for IG funds. YTD flows into IG stand at +$22.5bln relative to +$13.1bln for the same period last year. Demand for IG credit has been strong as investors look to lock-in yields ahead of potential Fed rate-cuts.

08 Mar 2024

Insight, Investment Grade Weekly Josh Adams - Portfolio Manager 0 comment

CAM Investment Grade Weekly Insights

Spreads were relatively unchanged during the week as the index sat 7bps off its tightest levels of the year through Thursday’s close. The Bloomberg US Corporate Bond Index closed at 96 on Thursday March 8 after having closed the week prior at 97. The 10yr is trading at 4.07% this Friday morning after closing last week at 4.18%. Through Thursday, the Investment Grade Corporate Index YTD total return was -0.54%.

Economics

The two highlights of the week were Jay Powell’s testimony to Congress on Wednesday morning and the nonfarm payrolls report on Friday. Chairman Powell stayed on message while addressing lawmakers. He continued to emphasize the Fed’s commitment to data dependency while indicating it is likely that the FOMC will begin to cut rates in 2024. The jobs number on Friday was the type of print that had something for both the “cut now camp” and the “no cuts in 2024 camp.” The report showed that the U.S. unemployment rate climbed to a two year high for the month of February while wage growth slowed. Still, payrolls continued to grow at a healthy rate and the unemployment rate remains quite low by historical standards. Post jobs report, interest rate futures were fully pricing in a 25bp rate cut in June and a total of 100bps by the end of 2024.

Issuance

In what seems to be a recurring theme, it was another banner week for issuance as more than $50bln of new debt priced for the third consecutive week. 2024 continues to be the busiest year in the history of the investment grade primary market with supply running at ~$440bln YTD, which is +30% YoY. Next week is expected to feature brisk activity as well with estimates looking for $30-$35bln of new debt.

Flows

According to LSEG Lipper, for the week ended March 6, investment-grade bond funds reported a net inflow of +$4.5bln. This was the twelfth consecutive weekly inflow for IG funds and the largest inflow in over a year.

23 Feb 2024

Insight, Investment Grade Weekly Josh Adams - Portfolio Manager 0 comment

CAM Investment Grade Weekly Insights

Another week is in the books and once again it is a year-to-date tight for credit spreads. The Bloomberg US Corporate Bond Index closed at 89 on Thursday February 22 after having closed the week prior at 92. The 10yr is trading at 4.26% this Friday morning after closing last week at 4.28%. Through Thursday, the Investment Grade Corporate Index YTD total return was -1.76%.

Economics

It was an extremely light week for economic data. Perhaps the highlight of the week was the release of the Fed minutes from the most recent meeting that highlighted consensus among policymakers about the risks of cutting rates too quickly. Next week brings some more action with many data releases including GDP, Core PCE and Personal Spending.

Issuance

It was a huge week for issuance even despite the fact that the market was closed on Monday. More than $53bln of new debt priced through Thursday and there is a rare large deal in the market on Friday that is likely to push the total past $60bln. Next week is expected to be reasonably busy with syndicate desks estimating about $30bln of new issuance.

Flows

According to LSEG Lipper, for the week ended February 21, investment-grade bond funds reported a net inflow of +$2.27bln. This was the tenth consecutive weekly inflow for IG funds.

16 Feb 2024

Insight, Investment Grade Weekly Josh Adams - Portfolio Manager 0 comment

CAM Investment Grade Weekly Insights

Credit spreads are back at the tightest levels of the year. The Bloomberg US Corporate Bond Index closed at 92 on Thursday February 15 after having closed the week prior at 95. The 10yr is trading at 4.30% this Friday morning after closing last week at 4.18%. Through Thursday, the Investment Grade Corporate Index YTD total return was -1.63%.

Economics

There was a boatload of data this week and it resulted in volatility in equities and Treasuries. The three major highlights are as follows: first, CPI came in hotter than expected on Tuesday morning which sent rates higher and stocks lower. Thursday morning was for the doves as retail sales data came in much weaker than expected –this sent rates lower. Finally on Friday morning, a data release showed that the producer price index rose more than expected. The PPI release sent rates to their highest levels of the week and stocks had a modestly negative reaction. At the end of the this note we have attached a weekly price graph of the 2-year Treasury as well as the Dow Jones Industrial average to illustrate some of the volatility that occurred in those markets during the week. As far as investment grade credit was concerned, the asset class fared well during the week as spreads shot tighter but there is a cautious tone in the market amid higher Treasury yields as we go to print this Friday morning. Next week is a holiday shortened week that is light on economic data. We are of the mind that the price action this week was ultimately helpful as we felt that there was far too much consensus from market participants on imminent rate cuts at the March meeting. The economic data has served to all but squash the prospect of a cut at the March 20 meeting and now we are seeing much more reasonable estimates from market prognosticators that the first rate cut may be delayed until the May, June or July meetings. We still don’t think it is a lock that the Fed cuts rates at all this year and we cannot discount entirely the possibility that inflation data remains sticky, pushing the first cut into 2025 and thus increasing the odds of a landing that isn’t necessarily hard but certainly isn’t soft.

Issuance

It was another active week for issuance as borrowers priced more than $37bln in new debt. Bristol Myers led the way as it printed $13bln across 9 tranches to fund its acquisitions of Karuna Therapeutics and Rayzebio. Next week is expected to be especially busy even despite the fact that the market is closed on Monday. Estimates are calling for as much as $45bln in new debt when the market reconvenes after Presidents Day.

Flows

According to LSEG Lipper, for the week ended February 14, investment-grade bond funds reported a net inflow of +$2.28bln. This was the ninth consecutive weekly inflow for IG funds.

U.S. 2 Year Treasury Last 5 Days:

Dow Jones Industrial Average Last 5 Days:

26 Jan 2024

Insight, Investment Grade Weekly Josh Adams - Portfolio Manager 0 comment

CAM Investment Grade Weekly Insights

Credit spreads are once again trading at the tightest levels of the year as we go to print. The Bloomberg US Corporate Bond Index closed at 93 on Thursday January 25 after having closed the week prior at 95. The 10yr is trading at 4.16% this Friday morning after closing last week at 4.12% –the 10yr yield is 24bps higher than where it began 2024. Through Thursday, the Corporate Index YTD total return was -0.99%.

Economics

It was a robust week of data and central bank meetings, although none of the releases resulted in large market swings. The Bank of Canada held its key rate at 5% on Wednesday while the ECB held its deposit rate at 4% for the third consecutive meeting on Thursday. In the U.S. the most anticipated release was Friday morning when the Federal Reserve’s preferred inflation measure hit the tape. PCE rose 0.2% in December from the previous month after posting a 0.1% decline in November. It showed that prices were up 2.6% on the year, which is much lower than the reading at the end of 2022. Bottom line, the data is showing significant progress in the war against inflation. Next week, all eyes are on the FOMC which releases its first rate decision of the year on Wednesday. Market prognosticators are looking for the Fed to hold steady but it is the commentary around the timing of easing that could impact global markets.

Issuance

Issuance this week was not paltry but it was underwhelming compared to the consensus estimate as companies priced $18.55bln in new debt relative to expectations of $25bln. There is one deal pending on Friday morning with its size to-be-determined which will add to the monthly total through Thursday of $167.8bln. Recall that the all-time record for the month of January was $175bln which was set in 2017. This record is well within striking distance as preliminary estimates for issuance next week are $20-$25bln.

Flows

According to Refinitiv Lipper, for the week ended January 24, investment-grade bond funds reported a net inflow of +$1.24bln. This was the sixth consecutive weekly inflow for IG funds.

19 Jan 2024

Insight, Investment Grade Weekly Josh Adams - Portfolio Manager 0 comment

CAM Investment Grade Weekly Insights

Credit spreads are looking to finish the week on a strong note, trading at the tightest levels of the year as we go to print. The Bloomberg US Corporate Bond Index closed at 95 on Thursday January 18 after having closed the week prior at 97. The 10yr is trading a 4.16% this Friday morning, up sharply on the week after having closed the week prior at 3.94%. The benchmark rate is now trading at its highest yield of the New Year. Through Thursday, the Corporate Index YTD total return was -1.35%.

Economics

It was a busy week for economic data with several market moving prints. December retail sales data on Wednesday came in with a larger increase than expected, fueling higher Treasury yields. On Friday, consumer sentiment rose to its highest level since January 2021, far in excess of the estimate. The data also showed that consumers expect prices will increase at an annual rate of 2.9% over the next year, down from 3.1% a month earlier. So far in 2024, the data has served to cool market expectations of near term Fed rate cuts. The market went from anticipating as many as 6 cuts in 2024 but now the expectation has shifted to 3 or 4 cuts based on interest rates futures. The next 10 days will be busy from a data perspective, culminating in a FOMC meeting on January 31.

Issuance

It was a huge week of issuance especially considering that the market was closed on Monday in observance of Martin Luther King Day. With no new deals on Friday, issuers managed to print >$49bln of new debt in three days bring supply for the month of January to nearly $150bln. Investor demand has been strong and new issue concessions have shrunk in concert as investors have gobbled up new paper leaving most new issues to immediately trade better in the secondary market. Another strong week could easily see this January surpass the all-time January record of $175bln that was set in 2017.

Flows

According to Refinitiv Lipper, for the week ended January 17, investment-grade bond funds reported a net inflow of +$227.3mm. This was the fifth consecutive weekly inflow for IG funds.

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