Josh Adams – Portfolio Manager – Page 9 – Cincinnati Asset Management

16 Sep 2022

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

CAM Investment Grade Weekly Insights

Investment grade credit spreads were unchanged for most of the week but the market has been drifting wider Friday morning so the index may finish 1-2 basis points wider by the time the sun has set on the week. IG credit led the way this week having substantially outperformed other risk assets on a spread basis. The Bloomberg US Corporate Bond Index closed at 141 on Thursday September 15 after having closed the week prior at 141. The 10yr Treasury closed last week at 3.31% and is trading at 3.43% as we go to print on Friday morning. Through Thursday the Corporate Index had a negative YTD total return of -15.58% while the YTD S&P500 Index return was -17.2% and the Nasdaq Composite Index return was -26.98%.

The big economic news of the week was the CPI print on Tuesday morning which showed that prices increased slightly in August versus market expectations for a slight decrease. This was a disappointing number for risk assets and stocks immediately reacted by trading much lower and Treasuries of all maturities sold off sharply. This report showed that the Fed still has much work to do before inflation cools to a level nearer its 2% target. CPI data has assured a 75bp hike at the FOMC meeting next week and has even brought forth the possibility of a surprise 100bp hike. Thursday morning brought with it the second big economic data point of the week with mixed retail sales numbers that showed a stronger than expected increase for August but a revision downward for July. The broad picture painted by the last couple retails sales reports has showed that consumer spending has been slowing for durable goods but has remained relatively strong for services. The Fed will be on the tape next week with its rate decision on Wednesday.

This was a volatile week with equities trading lower and Treasuries selling off, both of which served to impugn supply estimates with $18.7bln of new debt priced relative to estimates of $35-40bln. Next week the street is looking for about $15bln of issuance with Wednesday off limits for issuers due to the FOMC. Once again we find ourselves in more of a day-to-day type of environment for the new issue calendar.

Fund flows held up remarkably well this week considering the soft sentiment for risk assets. Per data compiled by Wells Fargo, outflows for the week of September 8–14 were -$0.4bln which brings the year-to-date total to -$111.6bln. This was the third consecutive week of modest outflows and the pace of outflows has decelerated each of the past three weeks.

09 Sep 2022

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

CAM Investment Grade Weekly Insights

Investment grade credit spreads were pushed wider to start the week after a deluge of new issue supply on Tuesday. By mid-Wednesday morning spreads were trending tighter after investors had a chance to digest issuance and now this Friday morning it is clear that the market is set to finish the week better than last which sets up well for another bout of new issue on Monday. The Bloomberg US Corporate Bond Index closed at 143 on Thursday September 8 after having closed the week prior at 145. The 10yr Treasury closed last week at 3.19% and is trading at 3.27% as we go to print on Friday morning. Through Thursday the Corporate Index had a negative YTD total return of -15.02% while the YTD S&P500 Index return was -15.12% and the Nasdaq Composite Index return was -23.74%.

The FOMC does not meet until September 21 but next Tuesday will see the release of the latest CPI figure which is a big data point that will guide the Fed in its choice of a 50bp or 75bp hike 12 days from now. Other central banks joined the rate-hike party this week. On Wednesday, the Bank of Canada increased its target for the overnight rate by 75bps to 3.25%, a 14-year high for that country. The European Central Bank followed suit on Thursday by increasing its deposit rate from 0% to 0.75%. The ECB also slashed its forecast of economic growth in 2023 to a mere 0.9%. Critics believe this growth target is overly optimistic and that the European economy will find itself in recession sooner rather than later and we at CAM agree with that view.

The holiday shortened week saw 31 companies sell over $51bln of new debt. The street is looking for $35-40bln of issuance next week and with CPI at 8:30am on Tuesday we would expect a tidal wave of issuance on Monday if the market tone is receptive as companies look to get ahead of that economic print. Issuance right now is very much day-to-day depending on the market’s appetite for risk on any given day as well as being highly dependent on the increasingly volatile Treasury market.

Per data compiled by Wells Fargo, outflows moderated this week of September 1–7 to -$0.9bln which brings the year-to-date total to -$111.2bln. This was the second consecutive week of modest outflows on the back of a 5 week streak of inflows for the asset class.

26 Aug 2022

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

CAM Investment Grade Weekly Insights

Investment grade credit spreads drifted wider in the first half of the week and then traded tighter amid low volume into Friday morning. After Fed Chair Jerome Powell spoke on Friday the street tried to take spreads wider but trading volume has remained low with the market in its end-of-summer seasonal slow-down. The Bloomberg US Corporate Bond Index closed at 134 on Thursday August 25 after having closed the week prior at 136. After the dust settles the index is likely to finish the week unchanged or close to it. The 10yr Treasury closed last week at 2.97% and is trading at 3.05% as we go to print on Friday morning. Through Thursday the Corporate Index had a negative YTD total return of -13.1% while the YTD S&P500 Index return was -11% and the Nasdaq Composite Index return was -18.78%.

Economic data this week was light relative to the last two weeks and much of the week was spent with investors anticipating Powell’s Friday morning speech. The speech was less than 10 minutes in length, but that was all the market needed to understand that the Fed is committed to using restrictive policy to reduce inflation even if it causes some pain for households and businesses. Chair Powell said 75bps is still on the table for the Fed’s September 21 FOMC rate decision.

There was no new issuance this week. It wouldn’t have been surprising if there would have been a deal or two on Monday or Tuesday but Monday was a volatile day for stocks and risk assets in general so issuers decided to pack it in for the week, and probably for the summer. We anticipate no issuance again next week before things start to pick up again after Labor Day. September is expected to see a high volume of issuance.

Investment grade credit reported a fifth straight week of inflows. Per data compiled by Wells Fargo, inflows for the week of August 18–24 were +$2.8bln which brings the year-to-date total to -$108.9bln.

19 Aug 2022

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

CAM Investment Grade Weekly Insights

Investment grade credit spreads were generally tighter to start the week and then drifted wider in the second half. The Bloomberg US Corporate Bond Index closed at 134 on Thursday August 18 after having closed the week prior at 132. The 10yr Treasury closed last week at 2.83% and is trading at 2.95% as we go to print on Friday morning. Economic data painted differing pictures this week. The Empire Manufacturing survey on Monday was absolutely dreadful and caused investors to ponder the impact of slowing growth in an economically important region. Housing starts declined for the sixth consecutive month and mortgage applications came in lighter than estimates. On the bright side, July retail sales showed some encouraging signs. Fed speakers throughout the week did their best to remind investors that they will do whatever it takes to lower inflation to 2%. This is not an opinion piece, but since you asked, it is our view that the market is much too complacent about the Fed and there seems to be this prevailing belief that the Fed will be ready and willing to immediately slash the Funds Rate in 2023 at the first hint of economic weakness. We simply disagree with this view and believe that the Fed is willing to inflict pain on equities and riskier assets in its quest to quell inflation. Through Thursday the Corporate Index had a negative YTD total return of -12.23% while the YTD S&P500 Index return was -9.22% and the Nasdaq Composite Index return was -16.69%.

Primary issuance was in line with expectations this week as more than $22bln of new debt was brought to market. As pointed out by Bloomberg, this was the fifth week in a row where actual volume met or exceeded concensus expectations, a good sign for the health of the primary market. Issuance will likely slow significantly until after Labor day at which point we expect substantial issuance if investors remain receptive. There has been $912bln of new issuance YTD which trails 2021’s pace by 5% according to data compiled by Bloomberg.

Investment grade credit reported a fourth straight week of inflows. Per data compiled by Wells Fargo, inflows for the week of August 11–17 were +$3.9bln which brings the year-to-date total to -$111.7bln.

12 Aug 2022

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

CAM Investment Grade Weekly Insights

Investment grade credit performed strongly this week as spreads moved tighter throughout. The Bloomberg US Corporate Bond Index closed at 135 on Thursday August 11 after having closed the week prior at 141. The 10yr Treasury closed last week at 2.83% and is trading at 2.85% as we go to print on Friday afternoon. On the economic front, the big news of the week was Wednesday’s CPI print which was the first data point that showed inflation might be slowing. Both headline and core inflation came in below expectations and stocks rallied on the news but most market participants agree that the battle is far from over; but it is an encouraging sign nonetheless. Through Thursday the Corporate Index had a negative YTD total return of -12.4% while the YTD S&P500 Index return was -10.89% and the Nasdaq Composite Index return was -17.31%.

Primary issuance continued to impress this week, although at a more subdued pace than the previous two weeks. Just over $30bln of new debt was brought to market. The primary market typically experiences a seasonal slowdown in the second half of August before things pick back up after Labor day. There has been $890bln of new issuance YTD which trails 2021’s pace by 6% according to data compiled by Bloomberg.

Investment grade credit reported a second straight week of strong inflows. Per data compiled by Wells Fargo, inflows for the week of August 4–10 were +$4.7bln which brings the year-to-date total to -$115.3bln.

05 Aug 2022

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

CAM Investment Grade Weekly Insights

Investment grade credit performance was mixed again this week. It looked like spreads would finish the week better bid but then the monthly payroll report hit on Friday morning. Things are volatile as we go to print so it is merely a guess but we could finish the week somewhere in the neighborhood of unchanged to modestly wider amid a risk off tone on the back of payrolls. The Bloomberg US Corporate Bond Index closed at 141 on Thursday August 4 after having closed the week prior at 144. The 10yr Treasury has been all over the map this week. The 10yr closed last week at 2.65%, closed Monday of this week at 2.57% and is now up at 2.84% mid-Friday morning. Fed speakers spent much of this week reinforcing their hawkish views and commitment to tame inflation and then a strong jobs report fueled a 14 basis point sell-off in 10s this morning. Front-end rates are getting hit even harder with the 2-year Treasury up nearly 18 basis points as we go to print. The short and intermediate portions of the Treasury curve are now more inverted than they have been at any point in this cycle. Through Thursday the Corporate Index had a negative YTD total return of -11.35% while the YTD S&P500 Index return was -12.11% and the Nasdaq Composite Index return was -18.88%.

Primary issuance was big this week with $56bln in new debt brought to market which exceeded even the highest of expectations. There was issuance from high quality household names such as Apple and Intel and Meta Platforms (fka Facebook) printed its inaugural bond deal of $10bln. Street estimates are looking for $20-25bln in issuance next week. There has been $859bln of new issuance YTD which trails 2021’s pace by 5% according to data compiled by Bloomberg.

Investment grade credit saw its highest weekly inflow in almost a year. Per data compiled by Wells Fargo, inflows for the week of July 28–August 3 were +$6.5bln which brings the year-to-date total to -$119.9bln.

29 Jul 2022

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

CAM Investment Grade Weekly Insights

Investment grade credit performance was mixed this week and it looks as though spreads will finish a basis point or two wider. The Bloomberg US Corporate Bond Index closed at 146 on Thursday July 28 after having closed the week prior at 144. The market is better bid as we go to print this Friday morning. The 10yr Treasury is yielding 2.69% after having closed the week prior at 2.75%. Economic data was varied throughout the week and it flowed through to Treasury curves in the form of volatility. The FOMC delivered a 75bps rate hike on Wednesday, in line with expectations. On Thursday, we got an exceptionally weak GDP print relative to expectations. The economy shrank for a second straight quarter but most economists were hesitant to call it a full blow recession and instead the preference at this point is to refer to it as a slowing of economic activity. On Friday the data was more supportive of the economy but less supportive of the Fed and its quest to tame inflation. The Labor Department’s employment cost index and the Commerce Department’s personal consumption price index both posted increases that were larger than forecasts. Through Thursday the Corporate Index had a negative YTD total return of -11.80% while the YTD S&P500 Index return was -13.81% and the Nasdaq Composite Index return was -21.92%.

The primary market saw $18.6bln of issuance this week which was on the screws relative to the $15-20bln estimate. The pace of issuance should see a slight acceleration next week so long as the market remains receptive. Street estimates are looking for $25-30bln in issuance which would be considered a fairly brisk week for early August. Expectations for supply during August are in the $70-$80bln range relative to 2021 which saw $86bln in issuance. There has been $803bln of new issuance YTD which trails 2021’s pace by 7% according to data compiled by Bloomberg.

Investment grade credit saw an inflow this week, breaking a 21-week streak of outflows. Per data compiled by Wells Fargo, outflows for the week of July 21–27 were +$0.7bln which brings the year-to-date total to -$126.4bln.

22 Jul 2022

Investment Grade Weekly Josh Adams - Portfolio Manager 0 comment

CAM Investment Grade Weekly Insights

Investment grade credit performed well this week and it got better with each passing day. The Bloomberg US Corporate Bond Index closed at 144 on Thursday July 21 after having closed the week prior at 150. Spreads have now retraced 10% from the YTD wide OAS of 160 which was the closing spread level for the index on July 5. The market is strong as we go to print on Friday. The 10yr Treasury is yielding 2.78% after having closed the week prior at 2.92%. The 10yr Treasury rallied Friday morning as S&P Global’s July survey of purchasing managers showed business activity contracted for the first time in more than two years. Through Thursday the Corporate Index had a negative YTD total return of -12.80% while the YTD S&P500 Index return was -15.38% and the Nasdaq Composite Index return was -22.92%.

The primary market roared to life this week as borrowers, led by money center banks, brought over $45bln in new bonds. It was the busiest week of issuance since mid-April. This pace will assuredly slow next week as earnings season ramps up and the FOMC takes center stage on Wednesday with a rate decision. Street estimates are looking for $15-20bln in issuance primarily on Monday and Tuesday. There has been $782bln of new issuance YTD which trails 2021’s pace by 8% according to data compiled by Bloomberg.

Investment grade credit saw another outflow on the week but with declining velocity. Per data compiled by Wells Fargo, outflows for the week of July 14–20 were -$1.2bln which brings the year to-date total to -$127.1bln.

09 Jul 2022

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

2022 Q2 Investment Grade Quarterly

The second quarter was another extraordinarily difficult period of performance for investment grade corporate credit. Treasury yields continued to march higher and credit spreads moved wider. The option adjusted spread (OAS) on the Bloomberg US Corporate Bond Index widened by 39 basis points to 155 after having opened the quarter at an OAS of 116. The 10yr Treasury opened the quarter at 2.34% and finished 67 basis points higher, at 3.01%. The 5yr Treasury opened the quarter at 2.46% and finished 58 basis points higher, at 3.04%. The 2yr Treasury opened the quarter at 2.33% and finished 62 basis points higher, at 2.95%. Some sections of the Treasury curve were inverted throughout the quarter which historically has been one of the leading indicators of a recession.

The Corporate Index posted a second quarter total return of –7.26%. CAM’s Investment Grade portfolio net of fees total return for the second quarter was –6.02%.

As much as it pains us and our investors to experience consecutive quarters of negative performance, not all hope is lost for investment grade returns in the future. The asset class has seen a meaningful drawdown and overwhelming negative sentiment has been priced into current valuations in our view. Higher Treasury yields and wider spreads have left investors with a much larger margin of safety in the asset class than there has been at any point in the past decade. We will discuss our views on where the market could go from here in the ensuing sections of this letter.

Is The Worst Over?

We have just endured a historically poor period of performance. The past two quarters were 2 of the 3 worst quarters in the history of the investment grade credit market and represent the worst 6 month performance period for the asset class. Looking at the bigger picture–we are talking about a brief time period of only six months. This asset class is not one that lends itself to tactical positioning and is more appropriate to view through the lens of a longer time horizon. That is why we tell our investors that a minimum time horizon of 3 to 5 years is needed to give our strategy the best chance of success. This is because the lynchpin of our strategy involves the intermediate Treasury and corporate credit curves. We typically purchase securities that mature in 8-10 years and look to sell those securities when they have 4-5 years left to maturity, redeploying those proceeds into attractive opportunities back further out the curve in the 8-10yr space. As bonds “roll down the curve” the bond math acts like water, finding its lowest level. All else being equal with rates and spreads, the price of a bond will move closer to par with each passing day of its existence. Bonds that have declined in value will start to recover with the passage of time as the time to maturity shortens.

As we mentioned in the opening section of this letter, the compensation afforded for credit spread and the underlying Treasury is much more than it has been in recent history. The index closed the second quarter at a spread of 155 relative to the 10yr average spread of 126. To provide some context on the rate of change over the course of the past year, on June 30 2021, the index closed at a spread of 80, which was its lowest level at any point in the past decade. As far as yield to maturity is concerned, the yield on the index was 4.71% at the end of the second quarter while the 10yr average was 3.09%. The index recently closed with its highest yield at any point in the past decade on June 14 2022, when it finished the day at 4.99%.

Now, we often caution against market timing and quite frankly we were wrong about valuations at the end of the first quarter because we thought they were relatively attractive at that point in time. Our valuation thesis crumbled throughout the second quarter while we watched rates continue to move higher and spreads traded wider due to macroeconomic concerns. This brings us to the question–can things get worse from here with higher rates and wider spreads? Absolutely, it could happen, and of course the opposite could come true as well and the market could see positive performance. What will happen over the short term is merely a guess. From a longer term point of view what we do know is that there is no denying that there is substantially more room for error for investors in investment grade corporate credit than there has been in a long time. We believe the Band-Aid has been ripped off at this point and that going forward we are much less likely to see a repeat of the eye watering negative returns that we saw in the first two quarters. Instead, we think the level of compensation afforded today sets up well for the potential to drive positive total returns for IG credit in the future over the medium and longer term.

Credit Conditions

Credit conditions for the investment grade universe remain strong, especially for the mostly highly rated companies, but conditions have declined so far this year and at this point it is clear that year-end-2021 was the peak for credit conditions in this cycle. Major factors that have led to the decline are higher borrowing costs due to rising interest rates and wider spreads. Inflationary pressures have also started to squeeze profit margins as companies are not able to pass the entirety of rising costs on to their customers. Inventory build and discounting have started to appear in some pockets of retail. Consumer confidence has slipped which historically has been a leading indicator of a slowdown in consumer spending.

Credit investors have begun to tread with caution as the majority of economists now expect a recession by the end of 2023.ⁱ The new issue market has slowed substantially in recent weeks amid volatility across risk assets. The market remains open for borrowers but investors are now demanding larger new issue concessions. This can present opportunities for bond investors as even very strongly capitalized highly rated companies will be forced to pay attractive new issue concessions in the current environment. This means higher coupons for investors. The key for a bond investor is to resist the temptation of the optically high yields offered by those companies that don’t have good balance sheets or those that trade at levels that do not offer adequate compensation for the risk. We are at a fairly interesting crossroads in the market where the prudently capitalized companies in the IG universe do not find themselves in a position where they “need” to borrow and we believe many of the companies that we follow would have likely issued new debt recently but simply decided not to because they don’t need the capital and more expensive borrowing costs have made raising new debt less attractive. On the other side of the coin are those companies that engaged in M&A or debt funded capital projects or shareholder rewards prior to the increase in borrowing costs. These CFOs and treasurers find themselves in the unenviable position of needing to borrow in a volatile market and trying to best gauge when to issue bonds. Some of these companies will be required to pay outsized new issue concessions in order to complete their bond offerings. Again, this could mean opportunity in select credits but some of the new deals simply won’t be cheap enough to offer adequate compensation for the risk. So what we find ourselves with today is a market that is highly bifurcated. For the vast majority of IG-rated companies, liquidity and cash on balance sheet remains near all-time highs and leverage is at very reasonable levels. For some other companies, they might have too much debt and the business and balance sheet are subsequently poorly positioned for an economic slowdown. In a recession scenario, many of the well capitalized companies will see margins contract and could see sales decline–but their balance sheets are in good shape and they are not over-levered so they will navigate a downturn just fine and easily make good on their commitment to pay bondholders while keeping their current credit ratings. For those companies that have too much debt and are also faced with declining revenues and profits –it could be a bumpy road during an economic slowdown and there will likely be some companies that see their bonds downgraded to junk. It is our job to manage the credit risk of the portfolio and avoid companies that are at risk of seeing their credit metrics decline precipitously. In a recession scenario, due to the strength of the highly rated, well capitalized portion of the investment grade universe, we believe investment grade credit will perform better than most other asset classes.

Portfolio Positioning

As an active manager we have been able to make what we felt were many opportunistic trades amid the market volatility of the past few weeks. To be clear, we will never make wholesale changes to our strategy but we will always tinker at the margins depending on the environment in our market at any given time. The Holy Grail for bond performance has three tenets –decrease maturity, increase yield and increase or maintain credit quality. If a manager can affect a trade that accomplishes all three, then it is likely to be successful over time. Currently, the biggest change to our management style is that the dislocation in the market has created opportunities for us to buy shorter maturities than we typically would. Intermediate Treasury curves were flat or inverted throughout most of the second quarter, depending on the day. The corporate credit curve still has a level of steepness but due to the nature of the way that the bond market trades–over the counter, price discovery and no exchange like equities, it can create attractive scenarios where a manager is able to buy shorter duration bonds of an issuer at levels that are more attractive than the longer bonds–a situation that should not exist in an efficient market–but the bond market is not always efficient. We have been able to populate investor portfolios with many more bonds that mature in 7 or 8 years (or even less in some cases) whereas in more normalized periods with steeper Treasury and corporate credit curves the math would favor 9-10 year bonds. All else being equal, a shorter maturity means less interest rate and credit risk for our investors. Note that we will always stick to our mandate of intermediate maturities.

In addition to being able to position more conservatively from a duration standpoint, we are also being cautious with credit risk. Credit health is still quite good for many issuers even if some companies have begun to experience a slight decline in margins and profitability. At the moment we are avoiding more cyclical credits in favor of stability. As investors have started to factor in the increasing probability of a recession, the spread gap between lower rated and higher rated credit has grown, and lower rated has performed relatively worse. We see select opportunities in BAA-rated credit but continue to limit our exposure to 30% of investor portfolios while the index was 49.53% BAA-rated at the end of the second quarter. We will not be increasing our weighting to riskier credit and our preference for lower rated credits at the moment is limited to those companies that have stable or improving credit metrics or those that are in the process of deleveraging. As far as A-rated companies are concerned, they will continue to make up approximately 70% of investor portfolios and we are favoring industries like utilities and highly rated energy companies. We also like non-discretionary healthcare and technology companies that will continue to grow earnings regardless of the economic environment. We believe that the risk of recession has increased substantially and are looking to populate portfolios with companies that can navigate an environment of negative growth with little impact to credit worthiness.

Hawks & Doves

During the second quarter the Federal Reserve made it abundantly clear that they were focused on conquering inflation as they delivered a 50bps hike in May followed by a 75bps hike in June. The next FOMC rate decision is July 27 and Chairman Powell has messaged that 50-75bps will be on the menu, depending on the economic data over the course of the next few weeks. Recent economic data has indicated an increasing possibility of a slowing economy and traders are now pricing in 50bps of rate cuts in 2023. Current projections foresee a peak for Fed Funds of ~3.3% in early 2023 up from 1.75% today with a prediction that the benchmark rate will be 2.7% at year-end 2023.ⁱⁱ What this means is that traders are predicting a recession by mid-2023 as that would be the catalyst for a rate cut in the second half of next year. Inflation is not a problem unique to the U.S. and a myriad of central banks have joined the Fed in the quest to quell rising prices. Australia, Canada, New Zealand and Switzerland have raised their policy rates in recent weeks and even the reticent ECB has signaled a series of rate hikes that will begin in July.ⁱⁱⁱ As a result, the amount of global negative yielding debt has tumbled from nearly $17 trillion in August of 2021 to just over $2 trillion at the end of the second quarter. The Bank of Japan is the only major central bank that has resisted tightening financial conditions.

Our job is to manage credit risk, not to speculate on rates or try and predict the Fed’s next move. That doesn’t mean we don’t care, just that our time is better spent on studying individual companies and their creditworthiness and not trying to predict the next move of a central bank as it is very much a game of chance. What we do know is that the economic data that the Fed uses to guide its policy decisions is backward looking in nature, not forward looking. Regardless of how much the Fed raises its policy rate, it seems likely that it will do so until it overshoots, finding itself in a situation where it raises the policy rate during the early stages of a U.S. recession. In other words, the Fed will be hawkish until it isn’t, and it will continue to tighten financial conditions until inflation is no longer a problem. What does this mean for credit? If there is a recession it could mean wider credit spreads. We plan to position the portfolio accordingly and with the type of companies that can weather an economic downturn.

Making the Turn

We are more than halfway through 2022 and there are more risks for credit today than when we started the year. The good news is that much of this bad news has been priced into valuations. This has created opportunity in our view but we will continue to be diligent and screen each of our investments carefully. Now is not the time to reach for yield, but to invest in the bonds of those companies that are well positioned and allocate capital in a creditor-friendly manner. We will be doing our very best to pick those investments that have the best chance to generate positive returns for our investors. We thank you for your patience during this turbulent time. As always we encourage you to contact us with questions. Thank you for your interest and partnership.

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.

i Fortune, June 13 2022, “Over two thirds of economists believe a recession is likely to hit in 2023”
ii Bloomberg, July 5 2022, “Traders looking to get ahead of Fed again foresee rate cuts”
iii Reuters, June 10 2022, “Central banks double down in fight against ‘galloping’ inflation”

24 Jun 2022

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

CAM Investment Grade Weekly Insights

Investment grade credit has had a week of mixed performance. The Bloomberg US Corporate Bond Index closed at 149 on Thursday June 23 after having closed the week prior at 144. The market tone has been good for risk assets on Friday and it looks likely that spreads will finish the week on a positive note. The 10yr Treasury is yielding 3.12% as we go to print after having closed the week prior at 3.23%. The 10yr is down substantially from just 10 days ago when it closed at 3.47% on June 14. Through Thursday the Corporate Index had a negative YTD total return of -14.42% while the YTD S&P500 Index return was -19.77% and the Nasdaq Composite Index return was -27.93%.

New issue activity returned this week but was relatively low volume as IG issuers brought just over $10bln in new debt to market. The consensus expectation is that there will be be about $15bln in issuance next week but it would not surprise us to see less or more than that figure, depending on market conditions. There has been $708bln of new issuance YTD which trails 2021’s pace by 9% according to data compiled by Bloomberg. It looks as though June will fall short of the $90bln estimate for new debt, with just $61bln priced thus far during the month.

Investment grade credit saw another outflow on the week. Per data compiled by Wells Fargo, outflows for the week of June 16–June 22 were -$9.0bln which brings the year-to-date total to -$107.2bln.

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