Author: Josh Adams - Portfolio Manager

Investment grade credit spreads experienced a steady grind tighter this week.  The Bloomberg US Corporate Bond Index closed at 133 on Thursday June 15 after having closed the week prior at 138.  The investment grade credit market is feeling good vibes again as we go to print this Friday morning.  Equity futures too are in the green after a strong risk rally on Thursday.  Treasuries may finish the week unchanged.  The 10yr Treasury is currently 3.74%, which is exactly where it closed trading last week.  There were times this week where it looked like the 10yr would break through 3.85% but mixed economic data sparked a bit of a rate rally on Thursday morning.  Through Thursday June 15 the Corporate Index had a YTD total return of +3.03%.

The economic data this week was mixed for the most part which is the continuation of a larger theme we have experienced in recent months.  The data is and has been varied enough that bears, bulls and prognosticators of all stripes can pick and choose, arriving at a variety of views and outlooks.  The biggest news during the week of course was Wednesday’s Fed meeting, although the result was so well telegraphed in advance that it was largely a non-event for markets.  The Fed paused for the first time in 15 months but may look to resume hikes as soon as July and the Fed’s own projections are calling for two additional hikes in 2023.  Speaking of Fed projections, we would point out that, one year ago at its June 2022 meeting, the median Fed dot plot implied a June 2023 target rate of 3.75% while the actual current Fed Funds rate is 5.25%.  This miscalculation does not mean that the Fed is bad at its job or that it is not credible.  The Fed has a very difficult task against an evolving backdrop and its predictions are not prophecy.  We believe that economic data and especially the labor market will continue to guide the Fed in its decision making.

Issuance was very light this week with just $10.4bln in new debt relative to consensus estimates of $15-$20bln.  This isn’t too shocking to us as issuance is usually light during weeks when the Fed meets and the calendar is getting more into the summer vacation season.  The market is also closed next Monday for the Juneteenth holiday.  With nine business days left in the month, June has seen $61bln in issuance.  Next week the street is looking for $15bln in new debt.

According to Refinitiv Lipper, for the week ended June 14, investment-grade bond funds collected more than $4bln of cash inflows.  IG inflows have been consistently positive in recent weeks and this was one of the strongest weeks of the year so far.

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.

Investment grade credit spreads drifted wider through the first half of the week and into Wednesday’s close on the back of new issue supply.  Spreads then snapped tighter Thursday afternoon on the hope that there could be a near term resolution to the debt ceiling.  After the move tighter, spreads were unchanged on the week –the Bloomberg US Corporate Bond Index closed at 145 on Thursday May 18 after having closed the week prior at the same level.  The market eagerly awaits comments and a Q&A session with Jerome Powell and Ben Bernanke at 11 a.m. Friday morning.  Rates across the board were higher this week, and yields are the highest they have been since early March.  The 10yr Treasury is trading at 3.69% as we go to print after closing the prior week at 3.46%.  Through Thursday, the Corporate Index had a YTD total return of +2.16%.

It was a relatively light week for economic data with no real surprises in retail sales data, housing starts or initial jobless claims.  As we mentioned previously, it seems that the possibility of a weekend agreement on the debt ceiling has been the catalyst for higher Treasury yields.  Fed Funds futures are currently pricing in a +31.6% chance of a hike at the June 14 meeting but there will be plenty of data points between now and then that could change that picture.  Big economic releases next week include GDP, personal spending/income and core PCE.

It was a big week for issuance with nearly $60bln in new supply with Pfizer leading the way as it printed an 8-part $31bln deal to fund its acquisition of Seagen.  The Pfizer deal was the 4^th largest bond deal of all time and the largest deal since CVS priced $40bln to fund its acquisition of Aetna in March of 2018.  Pfizer was priced with attractive concessions to incent demand and all eight tranches of the deal are trading tighter than where they priced on Tuesday afternoon.

Also of note, Schwab printed $2.5bln of new debt this week which, in our view, indicates that investors have regained some comfort around the ability of the regional banking sector to persevere.  Issuance thus far in the month of May has not disappointed with $123bln in supply month to date.  Year to date supply is $584bln.  Next week, new issuance will likely be front-end loaded as the market has a 2pm early close on Friday ahead of the Memorial Day weekend.

According to Refinitiv Lipper, for the week ended May 17, investment-grade bond funds saw +$2.163bln of cash inflows.  This was the second consecutive inflow after funds collected +$1.43bln last week.

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.

Investment grade credit spreads moved wider throughout the week. The Bloomberg US Corporate Bond Index closed at 148 on Thursday May 4 after having closed the week prior at 136.  The 10yr Treasury yield was only a few basis points higher this week after having closed last Friday at 3.42%.  Through Thursday, the Corporate Index had a YTD total return of +3.92%.  Much of the softness in spreads this week can be traced to renewed fears about regional bank deposits and capitalization.  It didn’t help matters that TD and First Horizon agreed to terminate their $13bln merger on Thursday.  Midway through the trading day on Friday we are seeing a relief rally in financials which could lead the index to close tighter for the day.

There was a huge amount of data to analyze this week. The biggest event of the week was on Wednesday as the FOMC chose to raise its benchmark rate by +25bps, in line with expectations.  The Fed did not go as far as to say that this was the last hike of this cycle but it left open the possibility that it could be.  On Friday, we got a very solid labor report that won’t make the Fed’s job any easier.  The unemployment rate edged lower to 3.4% while the labor market added +253k jobs during the month of April relative to expectations of a jobs gain of just +185k.  There were also ISM services and manufacturing releases this week that indicated a strengthening economy during the month of April.  Overall, the data on the week was mixed, but it reinforced the “higher for longer” narrative that some prognosticators are predicting out of the FOMC.  Away from the U.S. we also got a +25bps policy rate increase by the ECB with signaling of further tightening to come.

The primary market got off to a strong start in what is expected to be a busy month of May.  Through Thursday, $28.35bln in new debt had priced.  This is an impressive figure considering the fact that spreads drifted wider throughout the week.  There are 2 deals pending on Friday totaling $1bln+ which will likely be enough to push the weekly total beyond $30bln.  Supply estimates next week are calling for another $30-$35bln in new debt.

According to Refinitiv Lipper, for the week ended 5/3/2023, investment-grade bond funds reported an inflow of +$0.322bln.

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. 

Investment grade credit spreads were mostly unchanged for the second consecutive week with the spread on the index just slightly wider from where it started the week. The Bloomberg US Corporate Bond Index closed at 135 on Thursday April 27 after having closed the week prior at 133.  The 10yr Treasury yield trended lower throughout the week with the benchmark rate trading at 3.48% as we go to print relative to 3.57% at the close last Friday. Through Thursday the Corporate Index had a YTD total return of +3.7% while the S&P500 Index return was +8.3% and the Nasdaq Composite Index return was +16.3%.

It was a quiet week in that the Federal Reserve was in media blackout so there weren’t many speeches to parse but there was still plenty of economic data.  On Friday we got a PCE inflation print that showed that inflation remained a problem last month which will likely reinforce the case for a Fed rate hike next Wednesday.  Also on Friday morning, the spending numbers showed that consumers are starting to lose steam with the February spending number seeing a downward revision and the March number coming in flat.  There will be plenty of action next week starting with a FOMC rate decision on Wednesday.  The debt ceiling looms large and more frequent headlines will start to become a regular occurrence as we drift closer to the X date.

The primary market was reasonably active given that earnings season is in full swing.  $16.85bln in new debt priced this week which just eclipsed the high end of the $10-$15bln estimate.  There are no new deals in the queue this last day of April so new issuance will finish with a monthly total of just $66bln vs a $100bln estimate.  The big questions for May: will supply come to fruition and what will the impact be on credit spreads?  May is typically a seasonally busy month having averaged $135bln in new supply over the past 5 years.

According to Refinitiv Lipper, for the week ended 4/26/2023, investment-grade bond funds saw -$1.3bln of cash outflows.  This was the first reported outflow for investment grade since March.

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. 

Investment grade credit spreads drifted sideways this week and if that trend holds then it looks likely that the index will finish the week unchanged.  The Bloomberg US Corporate Bond Index closed at 134 on Thursday April 20 after having closed the week prior at 134.  The 10yr Treasury traded in a narrow range this week and the yield is 3.55% as we go to print which is 4 basis points higher than its closing level last Friday.  Through Thursday the Corporate Index had a YTD total return of +3.93% while the S&P500 Index return was +8.1% and the Nasdaq Composite Index return was +15.5%.

This was the first week in a while where there wasn’t an economic data point that had a significant impact on spreads or rates.  Most of the data that was released this week was in-line with expectations, including housing starts and initial jobless claims.  The market firmly expects a +25bp rate hike at the May 3^rd FOMC meeting.  Fed funds futures are currently pricing the probability of a hike at +92.4%, a 10% increase from last Friday. The Fed media blackout starts this Saturday and we welcome the 1.5 week reprieve from parsing every word from each of the 12 FOMC members.

The primary market had a busy week as issuers priced $28.85bln of new debt through Wednesday versus the high end of projections that called for just $15bln.  There was no issuance on Thursday or Friday.  Banks were expected to deliver this week and they did so in a big way with BofA and Morgan Stanley printing $8.5bln and $7.5bln, respectively.  BNY Mellon and Wells Fargo also tapped the market.  Although this week was strong, April as a whole has been underwhelming with just under $49bln of new debt being priced thus far relative to projections that were calling for more than $100bln at the beginning of the month.  Forecasts are calling for $10-$15 billion of issuance next week, so it looks unlikely that we will approach that $100bln monthly figure with just 5 trading days remaining.

According to Refinitiv Lipper, for the week ended 4/19/2023, Investment-grade bond funds collected +$1.14bln of cash inflows.

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. 

Investment grade credit spreads will likely finish the week tighter.  The Bloomberg US Corporate Bond Index closed at 137 on Thursday April 13 after having closed the week prior at 141.  The 10yr Treasury is trading at 3.51% as we go to print which is 20 basis points higher than the YTD low at the close last Thursday.  Through Thursday the Corporate Index had a YTD total return of +3.99% while the S&P500 Index return was +8.5% and the Nasdaq Composite Index return was +16.5%.

It was a busy week for economic data.  On Wednesday there was a much anticipated CPI release that showed that inflation slowed slightly.  On Thursday we got a PPI release as well as Initial Jobless Claims and both painted a picture of a slowing economy.  Finally, on Friday we got a Retail Sales release that showed that, while sales slowed, the control group performed better than expected.  The control group feeds into PCE which is the Fed’s preferred inflation gauge. All told, the data showed that inflationary pressures are easing and the economy is cooling but likely not enough to dissuade the Fed from at least one additional hike at its upcoming meeting. Fed Funds Futures implied an 83.6% chance of a hike at the May 3rd meeting as we went to print.

The primary market met the low end of expectations this week as just under $11bln in new debt was printed.  Walmart led the way with a $5bln 5-tranche deal.  Next week’s issuance forecasts are all over the map and range from $10-$25bln.  This is because the bulk of issuance next week is expected to be from the banking industry and they may elect to tap the market in size or management teams may instead may wait for volatility in financials to further subside.

According to Refinitiv Lipper, Investment-grade bond funds collected $1.13bln of cash inflows after $1.79bln was added in the prior week.

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.

Investment grade credit spreads will finish the week wider amid an extremely volatile tape.  The Bloomberg US Corporate Bond Index closed at 143 on Thursday March 16 after having closed the week prior at 136.  The 10yr Treasury is wrapped around 3.46% as we go to print which is 23 basis points lower than where it closed the prior week.  Through Thursday the Corporate Index had a YTD total return of +1.69% while the YTD S&P500 Index return was +3.6% and the Nasdaq Composite Index return was +11.9%.

The volatility over the past week has really been something to behold.  Few things are worse for risk assets than problems in the banking sector, which is the foundation of the global economy.  The failures of Silicon Valley Bank and Signature Bank are highly idiosyncratic in nature and not representative of systemic issues in our view.  Treasury Secretary Janet Yellen put it best in her testimony yesterday when she remarked that those particular banks had been grossly mismanaged.  As far as our banking exposure is concerned, we have a high degree of confidence in the banks that populate our investment grade portfolio.  Our approach to the banking industry has always been to focus on well capitalized institutions that have broadly diversified revenue streams and geographically diverse lending footprints.  The very nature of our methodology excludes regional banks and specialty banks because their loan portfolios are either too specialized or the footprint is too concentrated.  All of CAM’s banking exposure is confined to the 15 largest banks in the U.S.  We believe that the Federal Reserve will do whatever it takes to restore confidence and stability in the banking sector.

The primary market was totally closed this week which is unsurprising given the volatility in spreads and rates.  According to Bloomberg, this was the first week with no investment grade primary deals since June of 2022.  This is a testimony to how infrequently the IG market is “closed” to issuers.  We actually believe high quality companies could have issued this week if they had wanted to as demand for credit in the secondary market was still quite good but there was little incentive for corporate treasury departments and CFOs to stick their neck out and try to print a deal in a market where Treasuries and credit spreads were moving in double digit increments intraday.  We would expect to see some higher quality issuance next week if volatility subsides.

Investment grade credit reported its first weekly outflow of the year.  Per data compiled by Wells Fargo, outflows for the week of March 9–15 were -3.8bln which brings the year-to-date total of positive inflows to +$62.1bln.

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. 

Investment grade credit spreads are set to finish the week tighter amid a strong market tone this Friday morning.  The fact that spreads moved tighter this week is an impressive feat amid higher Treasury yields and an extremely active primary market.  The Bloomberg US Corporate Bond Index closed at 122 on Thursday March 2 after having closed the week prior at 123.  The 10yr Treasury closed above 4% for the first time this year on Thursday but it has since fallen below that threshold as we go to print on Friday morning.  Through Thursday the Corporate Index had a YTD total return of -0.05% while the YTD S&P500 Index return was +4.0% and the Nasdaq Composite Index return was +9.7%.

The slate of economic data this week was lighter relative to recent weeks but the data flow continued to have market participants erring on the side of caution with regard to Fed policy.  We would argue that this should have always been the case but many prognosticators seemed to be holding on to the belief that the Fed would be delivering rate cuts in the second half of 2023.  Although a reversal in policy later this year cannot be ruled out we think the prevailing mood has shifted over the past two weeks and at this point the consensus view is that the Fed will indeed be hesitant to slash its policy rate until it is very clear that inflation will not be a longer term concern.  Again, we think the Fed has been transparent about how this process would play out, but the market sometimes hears what it wants to hear.  Fed officials continued to be hawkish in interviews and speeches this week which should reinforce this view.

The primary market remains healthy as it had its busiest week of the year, not in terms of volume but in terms of the number of deals and tranches.  Volume too was impressive at just over $46bln printed relative to the high end of estimates which was $40bln.  Year to date, $310.74bln of new debt has been priced.  Syndicate desks are estimating $35bln in supply for the week ahead.

Investment grade credit reported its largest inflow in almost two months.  Per data compiled by Wells Fargo, inflows for the week of February 23–March 1 were +5.0bln which brings the year-to-date total to +$50.4bln.

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. 

Investment grade credit spreads look set to finish the week marginally wider.  The Bloomberg US Corporate Bond Index closed at 119 on Thursday February 16 after having closed the week prior at 118.  The 10yr Treasury moved meaningfully higher this week as the market has begun to anticipate a more hawkish monetary policy stance from the Fed for the balance of this year.  The 10yr is wrapped around 3.88% as we go to print up 15 basis points from 3.73%, where it closed the week prior. Through Thursday the Corporate Index had a YTD total return of +1.31% while the YTD S&P500 Index return was +6.8% and the Nasdaq Composite Index return was +10.7%.

Economic data was mixed this week but in concert with some Fed speakers we are definitely finishing the week with a tinge of hawkish rate fear.  Quite frankly most investors were probably a bit too optimistic about a soft landing for the economy and rate-cuts by the Fed later this year.  We are in the camp that there is little if any chance that the Fed will underestimate its progress against inflation thus making it a high probability event that they go too far and tighten financial conditions too much which will eventually lead to a recession.  It could be this year or next –predicting the timing and depth of the recession is the difficult part.  On Tuesday we got a CPI print that came in hotter than expected but the good news is that inflation continued to decelerate year over year.  On Wednesday we got a surprisingly strong retail sales number –this is after retail sales declined in both November and December.  Finally on Thursday, the U.S. Producer Price Index came in hot with January up 0.7% relative to expectations of 0.4%.  Housing starts were released as well and were down 4.5% y/y in January but this was easily overlooked by the market due to an increase in permitting activity which may filter through soon to housing starts leading to a bounce off the lows.  The housing picture is still quite grim for single family but it is multifamily that is seeing the vast majority of the permitting activity and it is multifamily construction that will at some point likely lead to a bounce of the bottom for housing starts.  Thursday also brought us a couple of hawkish speeches by Federal Reserve Bank president’s Mester and Bullard.  It is worth noting that Mester, who has repeatedly advocated for additional (and larger) rate hikes, is not currently a voting member for FOMC-rate decisions nor is St. Louis Fed President Bullard.

It was a big week for the primary market as issuers sold $54bln+ of new debt.  This was double the consensus estimate and points to continued strong investor demand for corporate credit.  Perhaps most surprising was that secondary spreads actually held in pretty well given the deluge of new issue supply and the relatively hawkish backdrop for risk throughout the week.  The largest deal of the week and was Amgen’s $24bln deal to help fund its acquisition of Horizon Therapeutics.  The Amgen deal was spread across 8 tranches spanning from 2-40 years.  The Amgen print was the 9^th largest deal on record and at its peak the deal had over $90bln in orders. Monday is a holiday and the bond markets will be closed but investors are still expecting about $25bln of new supply next week.

Investment grade credit reported another week of inflows.  Per data compiled by Wells Fargo, inflows for the week of February 9–15 were +2.5bln which brings the year-to-date total to +$40.9bln.

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.