Author: Rich Balestra - Portfolio Manager

(Bloomberg)  High Yield Market Highlights

• The High Yield Index didn’t have much going on over the past week
• There were no new issues to speak of during the late summer lull. Month-to-date issuance remains at $18 billion, and Year-to-date issuance stands at $197 billion.
• The Index spread tightened 4 basis points to 308 and the yield moved just 1 basis point lower to settle at 7.30.

(Bloomberg)  Powell Says ‘Time Has Come’ for Fed to Cut Interest Rates

• Chair Jerome Powell said the time has come for the Federal Reserve to cut its key policy rate, affirming expectations that officials will begin lowering borrowing costs next month and making clear his intention to prevent further cooling in the labor market.
• “The time has come for policy to adjust,” Powell said last Friday (8/23/24) in the text of a speech at the Kansas City’s Fed’s annual conference in Jackson Hole, Wyoming. “The direction of travel is clear, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook and the balance of risks.”
• The Fed chief acknowledged recent progress on inflation, which has resumed moderating in recent months after stalling earlier in the year: “My confidence has grown that inflation is on a sustainable path back to 2%,” he said, referring to the central bank’s inflation target.
• The Fed has held its benchmark rate in a range of 5.25%-5.5% — its highest level in more than two decades — for the last year in support of that goal, propping up borrowing costs across the economy.
• Yet just as inflation has neared its target, cracks have appeared on the employment front, prompting several Fed officials to worry that high rates now pose a threat to the economy’s continued strength. Warning signals included a disappointing July jobs report that rattled financial markets.
• “We do not seek or welcome further cooling in labor market conditions.” Powell said, adding that the slowdown in the labor market was “unmistakable.”
• After being late to raise rates in response to an inflation surge during the Covid-19 pandemic, Powell’s remarks underscore how Fed officials are hoping to avoid another policy error.
• “Our objective has been to restore price stability while maintaining a strong labor market, avoiding the sharp increases in unemployment that characterized earlier disinflationary episodes when inflation expectations were less well anchored,” Powell said. “While the task is not complete, we have made a good deal of progress toward that outcome.”
• At their last gathering in July, the “vast majority” of Fed officials felt it would likely be appropriate to cut rates in September if economic data continued to come in as expected.
• While inflation remains above the Fed’s goal, it has retreated markedly from its recent peak of 7.1% in 2022. The central bank’s preferred inflation gauge, the personal consumption expenditures price index, rose 2.5% in June from a year earlier. A separate measure of underlying consumer inflation cooled in July for a fourth straight month. Meanwhile, the unemployment rate ticked up last month, also for a fourth straight time, reaching 4.3%, and employers pulled back on the pace of hiring.
• Powell said policymakers “will do everything we can to support a strong labor market as we make further progress toward price stability.”
• At their gathering next month, Fed officials will release fresh set of economic projections and indicate where they anticipate their policy rate will be at the end of each year through 2026.

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.

(Bloomberg)  High Yield Market Highlights

• US junk bonds are headed for their second straight weekly gain — and the biggest in five weeks — as yields plunged to a fresh year-to-date low of 7.53% after US inflation eased for the fourth month on a year-over-year basis. Soft economic data reinforced market bets that the Federal Reserve will begin cutting rates in September.
• The broad rally in the US junk-bond market extended across ratings. BB yields hit a new two-year low of 6.20% and spreads dropped below 200 basis points, driving the second straight week of gains and the most since the week ended July 12. BBs have rallied for eight consecutive sessions.
• After oscillating between concerns about inflation and growth over the past 12 months, growth worries seem to be driving markets now, fueling expectations of a 50bps cut in each of the next five Fed meetings, Goldman Sachs economists Kamakshya Trivedi and Dominic Wilson wrote on Thursday
• However, Trivedi and Wilson write, growth fears have moved too far, and some sections of the market look overpriced. They expect continued expansion and decelerating inflation, rather than an imminent recession
• While acknowledging risks from data and geopolitics, there is still value in positioning for the “right tail” to be able to respond quickly to policy easing when it occurs, they wrote
• Bloomberg’s US chief economist Anna Wong expects Fed Chair Powell to say at this year’s Jackson Hole gathering that monetary policy has worked as intended and the current level of rates is restrictive while also signaling that a rate cut is coming
• The recent rally after the Aug. 5 rout saw yields sink to a 2024 low, pulling borrowers into the market
• 11 borrowers sold $8.6b this week, taking month-to-date tally to $17b already

(Bloomberg)  Core US Inflation Eases a Fourth Month, Sealing Fed Rate Cut

• Underlying US inflation eased for a fourth month on an annual basis in July, keeping the Federal Reserve on track to lower interest rates next month.
• The so-called core consumer price index — which excludes food and energy costs — increased 3.2% in July from a year ago, still the slowest pace since early 2021.
• Economists see the core gauge as a better indicator of underlying inflation than the overall CPI. That measure also climbed 2.9% from a year ago. BLS said nearly 90% of the monthly advance was due to shelter, which accelerated from June.
• Inflation is still broadly on a downward trend as the economy slowly shifts into a lower gear. Combined with a softening job market, the Fed is widely expected to start lowering interest rates next month, while the size of the cut will likely be determined by more incoming data.
• “Investors and policymakers alike will find this report mostly good for markets and the economy,” said Jeffrey Roach,chief economist at LPL Financial. “As inflation decelerates, the Fed can legitimately cut rates yet keep policy restrictive overall.”
• Before their September meeting, officials will get more inflation readings plus another jobs report — which will be heavily scrutinized after the disappointing July figures helped spark a global market selloff and fanned recession fears.
• Fed Chair Jerome Powell and his colleagues have recently said they’re focusing more on the labor side of their dual mandate, which they’re likely to stress at their annual symposium in Jackson Hole, Wyoming next 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.

(Bloomberg)  High Yield Market Highlights

• US junk bonds staged a solid comeback from last week’s losses and are on track to post modest gains as yields plunged 22 basis points in three sessions – from 7.90% to 7.68% – and spreads tightened 42bps to 339.
• The rally extended across the ratings spectrum after labor market data eased worries about an imminent recession. The riskiest tier of the junk bond market, CCCs, are headed toward their sixth straight week of gains, the longest rising streak in 2024.
• CCC yields fell 39 basis in three sessions this week – from 12.92% on Monday to 12.53% at close on Thursday. Spreads dropped 57 basis points in the same period – from 890 to 833
• After several months of calm, spreads have been sharply wider over the past week, albeit well off the worst levels, amid slowdown concerns and positioning unwinds. “We see few signs of true credit stress,” but a further decline in yields could pressure spreads further, Brad Rogoff and Dominique Toublan of Barclays wrote Friday
• A strong rebound, with yields dropping and spreads tightening pulled US borrowers into the market on Thursday
• Six borrowers sold more than $4 billion, driving the month-to-date tally to $7.3b

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.

(Bloomberg)  High Yield Market Highlights

• US junk bond spreads jumped 11 basis points, the most one-day widening in six months, to a three-month high of 325, abruptly snapping the broad rally and triggering negative returns across the risk spectrum. The losses came after data showed further evidence that US manufacturing shrank the most in eight months and unemployment claims rose to a one-year high.
• The broad market losses driven by weak data seemed to question the Federal Reserve’s decision to not cut rates in the meeting earlier this week.
• The market has now priced in three rate cuts in 2024. The swaps market shows there is a 50% chance of one 50bps cut
• Softer-than-expected economic data from the past few weeks point to an economy that’s potentially slowing too fast. The market is clearly worried about tail risk, and a flight to quality is taking place, Brad Rogoff and Dominique Toublan of Barclays wrote on Friday
• The losses in the US junk bond cut across ratings taking cue from tumbling equities and a sell off in US Treasuries
• US junk bond yields rose , though modestly, to 7.61%, still just two basis points above the 2024 low of 7.59%
• BB spreads widened 10 basis points, also the biggest one-day jump in six months, to a two-month high 199. Yields rose to 6.32%, still just four basis points above a 17-month low of 7.28%
• CCC spreads rose 12 basis points, the most widening in more than two weeks, to 800. Yields rose to 12.28%
• The wild swings across risk assets are spurred by investors’ struggle to assess broad macro data and weakening corporate outlook at a time when the Fed seems to be not terribly concerned about growth

(Bloomberg)  Powell Says Fed Could Cut Rates ‘As Soon As’ September Meeting

• Federal Reserve Chair Jerome Powell said an interest-rate cut could come as soon as September after the US central bank voted to leave its benchmark at the highest level in more than two decades.
• “The question will be whether the totality of the data, the evolving outlook, and the balance of risks are consistent with rising confidence on inflation and maintaining a solid labor market,” Powell told reporters Wednesday. “If that test is met, a reduction in our policy rate could be on the table as soon as the next meeting in September.”
• His comments followed a Federal Open Market Committee decision to leave the federal funds rate in a range of 5.25% to 5.5%, a level they have maintained since last July.
• Policymakers also made several adjustments to the language of a statement released after their two-day meeting in Washington, signaling they are closer to reducing borrowing costs. Notably, the committee shifted to saying it is “attentive to the risks to both sides of its dual mandate,” rather than prior wording focused just on inflation risks.
• “In recent months, there has been some further progress toward the committee’s 2% inflation objective,” the FOMC statement said. “The committee judges that the risks to achieving its employment and inflation goals continue to move into better balance.”
• Officials also tempered their assessment of the labor market, noting job gains had moderated and the unemployment rate has moved up, but is still low. They said inflation has eased over the past year but remains “somewhat elevated.”
• Still, policymakers retained language that they didn’t expect it would be appropriate to lower borrowing costs until they had gained “greater confidence” that inflation is moving toward their target sustainably.
• The changes in the statement solidify a shift in tone among several policymakers, including Powell, recognizing growing risks to the labor market.
• A number of former Fed officials and economists had urged the Fed to cut rates at this meeting, including former Fed Vice Chair Alan Blinder and former New York Fed President William Dudley.

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.

(Bloomberg)  High Yield Market Highlights

• US junk bonds are poised to see their eighth straight weekly gains, potentially the longest such streak since January 2021, while spreads continue to hang around 300 basis points on interest-rate cut expectations.
• A survey of US economists showed that the expectation that the Federal Reserve will likely signal its plans to cut interest rates in September in the policy meeting next week. They said the US central bank will use the July 30-31 gathering to set the stage for a quarter-point cut at the following meeting.
• Bloomberg Economics’ Anna Wong expects core June PCE inflation — the Fed’s preferred price gauge — to slow to near the central bank’s 2% target on a three-month annualized basis. Also, expects details to show household finances are increasingly stretched. Together, these may persuade the Fed to begin easing rates in September
• While the high-yield market recorded negligible losses on Thursday, yields are still just six basis points away from the year-to-date low of 7.60% and are likely to end the week unchanged at 7.66%
• The gains for the week extend across ratings. CCCs, the riskiest tier of the junk-bond market, are on track to rally for the fourth straight week, the longest such streak since March. Yields are still near their five-week low and spreads unchanged at 794 basis points, also a four-week low
• BBs are also poised for their ninth consecutive weekly gains, the longest stretch in more than three years, even after registering small losses in the last two sessions
• BB spreads closed unchanged at 174 basis points, just six basis points above the four-year low of 168. Yields also held steady 6.34%, a mere six basis points away from the 17-month low of 6.26%
• Credit spreads remain relatively stable, despite a sharp pickup in equity volatility, Brad Rogoff and Dominique Toublan of Barclays wrote in a note Friday
• Still-compressed spreads, attractive all-in yields and light supply lured investors to high yield market, with US high yield funds reporting a cash intake of $1.5b for week ended July 24. This is the third straight week cash inflows into the junk bond funds
• The primary market, though winding down for the summer, has seen 10 deals price for $5.5b this 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.

(Bloomberg)  High Yield Market Highlights

• US junk bonds are headed for their seventh week of gains, which would match the run at the end of last year, though an 11-day winning streak ended Thursday amid broad weakness in equities.
• Though high yield overall lost 0.02%, CCCs continued to rebound from their underperformance
• That riskiest part of the junk bond market returned 01% to post a 12th-consecutive gain, the longest since March
• This week’s fresh gains have followed a bevy of Fed officials acknowledging the economy is slowing and inflation is cooling
• Chicago Fed President Austan Goolsbee was the latest to suggest that the central bank may need to lower borrowing costs soon in order to avoid a sharper deterioration in the labor market
• Spreads have been range-bound despite volatility partly due to positioning, Barclays’ Brad Rogoff and Dominique Toublan wrote on Friday, but also because of expectations that the economy will remain on a good path while credit fundamentals continue to be positive
• Despite the typical summer lull, four borrowers have sold $3b of notes this week, including CCC-rated bonds

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.

(Bloomberg)  High Yield Market Highlights

• US junk bonds are poised for a second-straight monthly gains, returning 0.9% so far as investors have shrugged off a hawkish Federal Reserve that’s signaled just one quarter-point cut in 2024.
• Yields have dropped eight basis points to 7.92%, while spreads widened just five basis points to 313bps as 5- and 10-year Treasury yields through Thursday had both fallen 21 basis points
• As we’ve written this week, uncertainty about the Fed’s rate outlook continued to take its toll in June on CCCs, the riskiest segment of the junk bond market
• Yields have jumped six straight sessions, the longest since January, and have surged 50bps in June to 12.87%, on track for their first three-month uptrend since October 2022
• Spreads have climbed 68bps this month to 814bps, set for the most since last October and this week hitting their widest since early February
• Still, CCCs have returned 50% so far in June
• Ba rated securities have returned 98% so far in June
• B rated securities have returned 90% so far in June
• Fed-fueled uncertainty has started keeping some high-yield borrowers on the sideline, with the primary market in June the slowest this year with almost $18b of issuance
• In the wake of the big start to the year, Barclays boosted its 2024 forecast to $280-300b from $200-230b

(Bloomberg)  Fed’s Favored Price Gauge Slows, Supporting Case for Rate Cut

• The Federal Reserve’s preferred measure of underlying US inflation decelerated in May, bolstering the case for lower interest rates later this year.
• The so-called core personal consumption expenditures price index, which strips out volatile food and energy items, increased 0.1% from the prior month. That marked the smallest advance in six months. On an unrounded basis, it was up just 0.08%, the least since November 2020.
• From a year ago, it rose 2.6%, the least since early 2021, according to Bureau of Economic Analysis data out Friday. Inflation-adjusted consumer spending posted a solid advance after a pullback in April, driven by goods and fueled in part by a jump in incomes.
• The report offers welcome news for Fed officials seeking to commence with rate cuts in the coming months, though policymakers will likely want to see additional reports like this one first. They recently dialed back their projections for rate cuts this year following worse-than-expected inflation data in the first quarter.
• “The deflation in goods prices and weakness we are starting to see at least gets us a path to a possible September cut,” said KPMG Chief Economist Diane Swonk.
• Central bankers pay close attention to services inflation excluding housing and energy, which tends to be more sticky. That metric increased 0.1% in May from the prior month, according to the BEA, the least since October.
• Household demand has so far remained resilient even as borrowing costs have taken a toll on some sectors of the economy. The report showed inflation-adjusted outlays for services rose 0.1%, driven by airfares and health care. Spending on merchandise advanced 0.6%, led by computer software and vehicles.

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.

(Bloomberg)  High Yield Market Highlights

• US junk bonds are headed for a third straight week of gains as investors continued to bet that the Federal Reserve will cut rates more than once this year, with retail sales data this week showing signs of consumer strain. Adding more evidence that the economy continued to slowdown, data for continuing claims, a proxy for the number of people receiving unemployment benefits, rose for a seventh straight week to 1.82m, just 1,000 shy of the highest level since the end of 2021, indicating the labor market is also cooling.
• Yields were range-bound this holiday-shortened week and are poised to decline modestly for the third consecutive week. Yields closed at 7.90% on Thursday.
• The primary market has seen a steady stream of borrowers this week. Six companies sold a little more than $3b in just three sessions
• The month-to-date volume is $14b
• The modest gains in the US junk bond market cut across all ratings, though CCC yields were set to climb for the fifth week in a row, closing at 12.54% on Thursday, the longest rising streak in more than two years
• CCCs, however, scored gains of 0.04% on Thursday, and are likely to close the week with modest gains. The week-to-date gain stand at 0.16%
• BBs are also on track for fourth week of positive returns, with week-to-date gains at 0.21%. BB yields fell five basis points week-to-date to 6.56%, also largely range bound, and may decline for the third week in a row
• US high-yield debt issuers delivered a solid first quarter with elevated earnings and generally positive guidance, JPMorgan strategists led by Nelson Jantzen wrote in note last week
• Even while credit metrics showed some modest erosion, leverage remains comfortably below the long-term average, Jantzen wrote

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.

(Bloomberg)  High Yield Market Highlights

• US junk bonds are headed to reverse April’s losses and record modest gains for the month of May, shrugging off the supply deluge as yields held steady and spreads hovered near 300 basis points.
• The primary market was inundated with new supply amid steady and near-historic tight spreads and attractive yields. The market priced more than $31b to make it the busiest month since September 2021. Attractive all-in yields acted as the stabilization factor for credit spreads, Barclays analysts Brad Rogoff and Dominique Toublan wrote earlier this month.
• Tight spreads are here to stay amid the absence of big leveraged buyouts and corporate mergers, Rogoff and Toublan wrote in a separate report Friday morning, citing their meetings with clients at the leveraged finance conference last week
• The supply deluge saw more than $13b price in the second week of May alone, the busiest week for issuance since October 2021. Two of the five weeks priced more than $10b
• Yields were largely range-bound since the Fed meeting in early May after Fed Chair Powell indicated on May 1 that a hike in interest-rates was unlikely
• Yields advanced to near 8% last week and crossed the 8% level this week after an array of Fed speakers turned hawkish and signaled that rates are likely to stay higher for longer
• Vice Chair for Supervision Michael Barr said that policymakers need to hold interest rates steady for longer than previously thought in order to fully cool inflation
• Cleveland Fed chief Loretta Mester, speaking at a panel moderated by Atlanta Fed President Raphael Bostic, said Tuesday that she wants to see “a few more months of inflation data that looks like it’s coming down” before cutting interest rates
• Federal Reserve Bank of Minneapolis President Neel Kashkari warned that the policymakers at the Federal Reserve have not ruled out additional interest-rate increases
• Atlanta Fed President Raphael Bostic said “ we still have a ways to go” to curb the significant price growth seen over the last few years
• Yields on the broad US junk bond index were down 3 bps for the month, though they climbed above 8% after staying in the range of 7.80%-7.90%
• BB yields dropped 12 basis points for the month to 6.77% after falling to 6.56% in the middle of the month, driving gains of 0.99% for May
• But CCC yields surged to a four-month high of 12.49%, rising 21 basis points month-to-date. Still, CCCs amassed gains of 0.32% for the month
• Single B yields fell 12 basis points to 7.84% and spreads were below 300 basis points, pushing gains of 0.76% for the months

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