Author: Rich Balestra - Portfolio Manager

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were -$1.3 billion and year to date flows stand at -$27.4 billion.  New issuance for the week was $0.5 billion and year to date issuance is at $35.4 billion.

 (Bloomberg)  High Yield Market Highlights

• U.S. junk bonds are headed toward the biggest weekly loss in 17 months as yields jump to a fresh 20-month high after inflation accelerated and the war on Ukraine intensified.
• Continuing volatility drove investors to pull cash from retail junk-bond funds for the ninth straight week, the longest losing streak since 2007
• U.S. high yield funds reported an outflow of $1.3b for the week
• The escalating war has increased the economic pressure on Russia, with the U.S. now calling for the end of normal trade relations, clearing the way for increased tariffs on Russian imports
• The sanctions are expected to spur inflation even higher and slow economic growth
• Bloomberg economist Anna Wong forecast that U.S. inflation could hit 9% as early as March or April with oil at $120 a barrel, and may end the year close to 7%
• Bloomberg economists have lowered 2022 U.S. GDP growth forecast to 2.5% from 3.6%
• The benchmark U.S. high yield index posts a loss of 1.29% week-to-date after reporting negative returns in three of the last four sessions
• The losses were across the board in the high yield market. BBs were leading the pack with week-to-date losses of 1.34%
• BB yields, the most rate-sensitive in the high yield market, also climbed to a 20- month high of 5.08% amid widespread fears of inflation disrupting growth
• CCCs are poised to post the least losses, with 1.20% week-to-date, while yields rose to a 16-month high of 8.82%
• The junk bond primary market has been quiet as borrowers have stayed away, waiting for some clarity on macro risks
• The primary market has slowed to a crawl
• The issuance volume was about $36b year-to-date, the slowest first quarter since 2009
• As of Friday morning, the markets may recover as U.S. equity futures edged higher amid reports that some progress is being made in talks between Russia and Ukraine

 (Bloomberg)  U.S. Inflation Hit Fresh 40-Year High of 7.9% Before Oil Spike

• U.S. consumer price gains accelerated in February to a fresh 40-year high, consistent with rapid inflation that’s become even more pronounced following Russia’s invasion of Ukraine.
• The consumer price index jumped 7.9% from a year earlier following a 7.5% annual gain in January, Labor Department data showed Thursday. The widely followed inflation gauge rose 0.8% in February from a month earlier, reflecting higher gasoline, food and shelter costs. Both readings matched the median projections of economists in a Bloomberg survey.
• Excluding volatile food and energy components, so-called core prices increased 0.5% from a month earlier and 6.4% from a year ago.
• The data illustrate the extent to which inflation was tightening its grip on the economy before Russia’s war brought about a spike in commodities, including the highest retail gasoline price on record. Most economists had expected February would be the peak for annual inflation, but the conflict likely means even higher inflation prints in the coming months.
• To combat building price pressures, the Federal Reserve is set to raise interest rates next week for the first time since 2018. At the same time, the geopolitical situation adds uncertainty to the central bank’s rate hiking cycle over the coming year.
• Fed officials could take a more hawkish stance if energy price shocks lead to higher and more persistent inflation, but they also may take a more cautious approach if sinking consumer sentiment and declining real wages begin to weigh on growth as the war drags on.
• The February report showed that gasoline prices rose 6.6% from the prior month and accounted for almost a third of the monthly increase in the CPI. Some of that may reflect energy price spikes resulting from the first days of Russia’s invasion during the last week of the month. The impact will be more fully captured in the March CPI report.
• So far this month, the retail price of a regular-grade gasoline has increased 19.3% to $4.32 a gallon, according to American Automobile Association data.

Food prices climbed 1% from the prior month, the largest advance since April 2020, the CPI report showed. Compared with February last year, the 7.9% jump was the biggest since 1981.

Fund Flows & Issuance: According to a Wells Fargo report, flows week to date were -$0.4 billion and year to date flows stand at -$26.0 billion. New issuance for the week was $1.7 billion and year to date issuance is at $34.9 billion.

(Bloomberg) High Yield Market Highlights

• U.S. junk bonds are headed to the first back-to-back weekly gains since December with the risk-off mood easing after Federal Reserve Chair Jerome Powell said U.S. economic growth was strong enough to warrant a quarter-percentage-point interest rate hike this month.
• That buoyed a market that had been weighed down by uncertainty over the economic outlook and the scope of the Fed’s coming interest rate hikes; traders last month speculated that the Fed could begin with a half-point rate increase.
• Even as the war in Ukraine intensifies and commodity prices soar, credit market technicals have held up, Barclays’ strategist Brad Rogoff wrote on Friday, though he added that spreads could come under pressure near-term.
• While sustained higher energy prices pose downside risks to the outlook, Barclays does not view them as sufficient to derail the recovery, Rogoff wrote.
• Yields have been resilient through the week, closing unchanged at 5.66% week-to- date.
• The 5-year and 10-year Treasury yields fell about 13bps week-to-date at close yesterday at 1.73% and 1.84%, respectively.
• Spreads closed at +358bps, just up by 5bps
• Junk bonds gained across ratings for the second straight week, with 0.21% returns for BBs, 0.22% single Bs and 0.15% CCCs.
• CCCs have lost some momentum and were the worst performing segment for the second consecutive week, pushing single Bs to the top.
• U.S. high yield may be in a holding pattern as equity futures slide and European stocks tumble to a one-year low as war risks intensified. Oil, meanwhile, is headed for the biggest weekly surge in almost two years after Russia’s invasion of Ukraine roiled global markets. 

(Bloomberg) Powell Backs Quarter-Point March Rate Hike, Open to Bigger Moves

• Federal Reserve Chair Jerome Powell backed a quarter-point interest-rate hike this month to commence a series of increases and didn’t rule out a larger move at some stage, despite uncertainty caused by Russia’s invasion of Ukraine.
• “I am inclined to propose and support a 25 basis-point rate hike,” Powell told the House Financial Services Committee Wednesday. “To the extent that inflation comes in higher or is more persistently high than that, then we would be prepared to move more aggressively by raising the federal funds rate by more than 25 basis points at a meeting or meetings.”
• Fed officials are pivoting to tackle the fastest inflation in 40 years and a few have publicly discussed the potential need to hike by a half point some time this year if inflation comes in too hot. They get February data on consumer prices on March 10, five days before they start their next policy meeting.
• While acknowledging the uncertainty posed by the attack on Ukraine, Powell said the need to remove pandemic policy support had not changed.
• “The bottom line is that we will proceed but we will proceed carefully as we learn more about the implications of the Ukraine war for the economy,” he said.
• Investors increased their bets on the pace of rate hikes this year as the Fed chief spoke, pricing in around 140 basis points of tightening starting this month — which will mark the first increase since 2018. U.S. stocks advanced and 10-year Treasury yields rose on Powell’s message that the economy is expanding with enough force to withstand higher borrowing costs.
• Powell said the labor market is “extremely tight,” essentially a message to lawmakers that the central bank has met its maximum employment goal in current conditions, which opens the door to its inflation fight. He said employers are having difficulties filling job openings, while workers are quitting and taking new jobs, helping wages rise at the fastest pace in years.
• “We know that the best thing we can do to support a strong labor market is to promote a long expansion, and that is only possible in an environment of price stability,” Powell said, restating a line he has used several times now that interprets the inflation fight in terms of preserving the expansion.
• The Fed chief said it wasn’t clear how high rates would have to rise to get inflation under control, in relation to the so-called “neutral” level that neither speeds up nor slows economic activity.
• “We talk about getting to neutral, which is a neutral rate which would be somewhere between 2% and 2.5%. It may well be that we need to go higher than that. We just don’t know,” he said, adding that he believed it was possible to deliver that tightening without causing a recession.

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were -$2.3 billion and year to date flows stand at -$25.6 billion.  New issuance for the week was $1.0 billion and year to date issuance is at $33.2 billion.

(Bloomberg)  High Yield Market Highlights

• U.S. junk bonds are headed toward the sixth straight weekly loss as yields jump to a fresh 16-month high of 5.85% amid global market turmoil after Russia’s invasion of Ukraine. This would be the longest losing streak in more than six years.
• The primary market ground to a halt after pricing a little more than $9b this month, the slowest February since 2016. It’s also the slowest start to a year for issuance since 2016, with year- to-date volume at $33b.
• Rising yields and steady losses in junk bonds across ratings came amid broader market turbulence this year caused by inflation concerns, a hawkish Federal Reserve and geopolitical tensions.
• Given the lack of clarity on macro risks, “risk assets will be under pressure in the near term,” Barlcays’ strategist Brad Rogoff wrote on Friday.
• The BB index, the most rate-sensitive part of the high-yield market, is now set to post its eighth straight weekly loss, the longest period of losses since July 2013, after yields veered toward a 19-month high of 4.83%.
• CCCs, the riskiest part of the junk-bond market, is also headed to end the week with losses. This would be the sixth consecutive week of losses as yields rose to a new 15-month high of 8.53%.

 (Bloomberg)  What the Russian Invasion Means for Credit

• Russia’s invasion of Ukraine will translate to more trouble for corporate debt, money managers say. Some also wonder if the latest market weakness is a buying opportunity.
• For now, few market participants are taking that risk. Companies postponed bond sales in the U.S. and Europe on Feb. 24 and credit risk gauges surged after Russia invaded Ukraine.
• The military action heightened volatility in global bond markets already roiled by inflation and tightening monetary policy. Now oil prices are rising to their highest levels since 2014, and wheat prices in Paris hit a record. The result of inflation plus slower growth may be stagflation that can be terrible for corporate bondholders.
• “The escalated uncertainty in Ukraine, and the spike in commodity prices, moderates the outlook for global growth and therefore increases the risk for corporate credit,” said Matt Toms, chief investment officer of fixed-income at Voya Investment Management.
• Borrowers who could sell debt easily on any day for much of the last two years are now having to look for windows of relative calm. Price swings in secondary markets are widening.
• New sales of U.S. investment-grade and junk bonds will likely shut down for the remainder of the week, according to people familiar with the matter. BellRing Brands on Feb. 24 withdrew a junk-bond deal that it had started marketing earlier in the week.
• U.S. leveraged loan prices fell 1/2 to a full point in muted secondary trading on Feb. 24, according to people familiar. Meanwhile, a gauge of U.S. credit risk spiked, with the cost to protect a basket of investment-grade dollar bonds against default rising to the highest level since July 2020.
• But even if the global growth picture is concerning, few U.S. companies will be severely affected by the invasion at this stage, investors said.
• “The entire global economy is going to be impacted by Russia and Ukraine, but there’s not really going to be a lot of direct impact in the U.S., in terms of issuers whose results are going to be directly impacted by what’s going on there,” said Jeremy Burton, a portfolio manager at Pinebridge Investments.
• Prices on investment-grade bonds now may end up being a great deal in retrospect, said Nicholas Elfner, co-head of research at Breckinridge Capital Advisors.
• “Keep your eyes on the long-term and don’t get sucked into the abyss of negativity,” Elfner said. “Short-term blips in volatility and weakness in financial markets tend to be long-term buying opportunities.”

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were -$3.6 billion and year to date flows stand at -$10.6 billion.  New issuance for the week was $6.0 billion and year to date issuance is at $25.4 billion.

 (Bloomberg)  High Yield Market Highlights

• The U.S. junk bond primary market was powered by leveraged buyouts this week as cyber security firm McAfee Corp. and Scientific Games Holdings, a gaming and lottery operator, together sold almost $3b, accounting for one-half of this week’s issuance volume as the high yield market recovered from its worst January on record.
• Junk bond borrowers of all stripes – funding strategic acquisitions, LBOs and plain-old refinancing outstanding debt – seemed to be in a hurry to rush to the market to get ahead of the rate-hike cycle, which is widely expected to begin as early as March, and avoid the uncertainty volatility that may follow.
• The U.S. leveraged finance market was also undergoing a shift triggered by the Federal Reserve’s signal that rate hikes may begin in the next meeting and the overall hawkish tone suggesting an end to the easy money policy.
• The shift became evident in McAfee Corp. and Scientific Games Holdings moving a portion of bonds to term loan as the latter, with a floating rate coupon and spot higher in the capital structure, were more attractive to investors in a rising rate environment.
• The junk bond market was broadly resilient even as cautious investors pulled cash out of high yield retail funds.
• Investors pulled almost $4b from U.S. high yield funds, the biggest weekly outflow since March of 2021 and the fourth consecutive week of outflows, the longest streak since June of 2021.
• While weak earnings reports and increased central bank hawkishness drove a sharp sell-off in risk assets, “it is still too early to buy the dip,” Barclays strategist Brad Rogoff wrote on Friday, adding that monetary policy uncertainty is likely to remain elevated.
• The broader junk bond returns came under pressure on Thursday posting losses of 0.4% as yields jumped 15bps to 4.21%.
• Junk bonds may pause as U.S. equity futures reversed gains as concerns over inflation and monetary tightening outweighed earnings optimism driven by Amazon.com, Inc.
• Oil, meanwhile, has rocketed to a fresh seven-year high near $92 a barrel, and almost every indicator is pointing to the rally extending.

(Bloomberg)  U.S. Job Growth Blows Past Estimates, Defying Gloom Over Omicron

• U.S. employers extended a hiring spree last month despite a record spike in Covid-19 infections and related business closures, with surging wages adding further pressure on the Federal Reserve to raise interest rates.
• Nonfarm payrolls increased 467,000 in January in a broad-based advance that followed substantial upward revisions to the prior two months, a Labor Department report showed Friday. The unemployment rate ticked up to 4%, and average hourly earnings jumped.
• The median estimate in a Bloomberg survey of economists called for a 125,000 advance in payrolls, though forecasts ranged widely. A variety of factors including omicron, seasonal adjustment and the way workers who are home sick are factored in make interpreting the January data challenging.
• The surprise display of strength suggests the labor market continues to improve, despite the temporary disruption from record-high levels of coronavirus infections and the resulting absenteeism from work. The data further reinforce Fed Chair Jerome Powell’s description last week of the labor market as “strong” and validate the central bank’s intention to raise interest rates in March to combat the highest inflation in nearly 40 years.
• The dollar jumped along with Treasury yields following the report. U.S. stock-index futures dipped slightly. Investors began to price in the slight possibility of a sixth quarter-point Fed rate hike by the end of this year, while continuing to see a March increase as a lock and nudging up the chance of a 50-basis-point jump.
• Meanwhile, the Labor Department’s report showed average hourly earnings rose 0.7% in January and 5.7% from a year ago, further fanning concerns about the persistence of inflation. The average workweek dropped.
• The faster-than-expected advance in pay could fuel market concerns about the Fed taking an even more aggressive stance on inflation this year.
• Despite the better-than-expected report, the impact of omicron on the labor market in January was substantial. There were 3.6 million employed Americans not at work due to illness, more than double that in December. Meanwhile, 6 million people were unable to work in the month because their employer closed or lost business due to the pandemic, roughly twice that in December.
• The potential for a weak — or even negative — payrolls print, largely because of virus-related disruptions, was well telegraphed in the days ahead of the report, including by White House and Fed officials.
• The job gains were broad based, led by a 151,000 advance in leisure and hospitality. Transportation and warehousing, retail trade and professional and business services also posted solid increases.
• The solid employment growth in several categories may reflect businesses choosing to retain more holiday workers than normal in the face of a tight labor market.

 Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were -$1.6 billion and year to date flows stand at -$1.0 billion.  New issuance for the week was $6.0 billion and year to date issuance is at $10.5 billion.

 (Bloomberg)  High Yield Market Highlights

• The U.S. junk-bond market rebounded from last week’s losses and is on track to end the week with gains, powered by a jump in oil prices and shrugging off outflows from retail funds. The rally boosted the primary market, which has seen $6 billion price.
• The risk-on mood was evident as two first-time issuers came to market. Borrowers sold debt to fund a dividend and buy back shares even as investors pulled cash from U.S. high-yield funds.
• The broader junk-bond index has made modest gains of 0.28% week-to-date after posting a small loss of 0.05% on Thursday.
• Junk-bond index yields rose to 4.51% yesterday, up 6bps, and is down 9bps week-to-date.
• The CCC index has gained 0.31% week-to-date after posting a modest loss of 0.02% yesterday.
• CCC yields rose 4bps to close at 6.95%, down 11bps week-to-date.
• The markets may waver as U.S. equity futures fluctuated ahead of the earnings season as investors turn away from inflation concerns and Federal Reserve policy. And oil, meanwhile, headed for a fourth straight weekly gain, the longest streak since October.

(Bloomberg)  U.S. Inflation Hits 39-Year High of 7%, Sets Stage for Fed Hike

• U.S. consumer prices soared last year by the most in nearly four decades, sapping the purchasing power of American families and setting the stage for the Federal Reserve to begin hiking interest rates as soon as March.
• The consumer price index climbed 7% in 2021, the largest 12-month gain since June 1982, according to Labor Department data released Wednesday. The widely followed inflation gauge rose 0.5% from November, exceeding forecasts.
• Excluding the volatile food and energy components, so-called core prices accelerated from a month earlier, rising by a larger-than-forecast 0.6%. The measure jumped 5.5% from a year earlier, the biggest advance since 1991.
• The increase in the CPI was led by higher prices for shelter and used vehicles. Food costs also contributed. Energy prices, which were a key driver of inflation through most of 2021, fell last month.
• The data bolster expectations that the Fed will begin raising interest rates in March, a sharp policy adjustment from the timeline projected just a few months ago. High inflation has proven more stubborn and widespread than the central bank predicted amid unprecedented demand for goods along with capacity constraints related to the supply of both labor and materials.
• Meanwhile, the unemployment rate has now fallen below 4%. Against this evolving backdrop, some Fed policy makers have said that it could be appropriate to begin shrinking the central bank’s balance sheet soon after raising rates.
• “In terms of where the Fed is on their dual mandate — inflation and the labor market — they’re basically there,” Michael Gapen, chief U.S. economist at Barclays Plc, said on Bloomberg Television. “I don’t really think anything stops them going in March except one of these kind of outlier events. I think they’re ready.”

(Bloomberg)  U.S. Retail Sales Slide Most in 10 Months on Inflation, Omicron

• U.S. retail sales slumped in December by the most in 10 months, suggesting the fastest inflation in decades is taking a greater toll on consumers just as the nation confronts more coronavirus infections.
• The value of overall purchases decreased 1.9%, after a revised 0.2% gain a month earlier, Commerce Department figures showed Friday.
• The median estimate in a Bloomberg survey called for a 0.1% drop in overall retail sales from the prior month.
• The year-end slide in retail purchases sets up for a tepid handoff to the first quarter. Combined with the impact from the omicron variant, which is denting outlays for services such as travel and dining out, the figures help explain why economists project household spending to soften.
• Furthermore, falling price-adjusted wages, dwindling savings and the end of the government’s pandemic-related financial programs suggest a more moderate pace of spending.
• December, at the tail end of the holiday-shopping season, is traditionally a solid month for retail sales. However, concerns about shipping delays prompted many consumers to shop earlier than usual to ensure gifts arrived on time. Because the figures are adjusted for seasonal variations, the earlier shopping may have contributed to the weaker-than-expected figures.

(Bloomberg)  Fed’s Brainard Says Curbing Inflation Is ‘Most Important Task’

• Federal Reserve Governor Lael Brainard said tackling inflation and getting it back down to 2% while sustaining an inclusive recovery is the U.S. central bank’s most pressing task.
• “Inflation is too high, and working people around the country are concerned about how far their paychecks will go,” Brainard said in remarks prepared for a confirmation hearing before the Senate Banking Committee. “Our monetary policy is focused on getting inflation back down to 2% while sustaining a recovery that includes everyone. This is our most important task.”
• Brainard was nominated by President Joe Biden to serve as Fed vice chair.

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were $0.2 billion and year to date flows stand at -$6.2 billion.  New issuance for the week was $5.2 billion and year to date issuance is at $459.9 billion.

 (Bloomberg)  High Yield Market Highlights

•  The recent selloff in the U.S. junk-bond market looks like the distant past as the index is now poised to post gains for the second consecutive week, and potentially the biggest gains in more than three months.
• The riskiest segment of the junk bond market, CCCs, are also on track to close the week with the highest returns since the end of August and are likely to be the best-performing asset class in the U.S. fixed-income market.
• Returns on the broader junk-bond index week-to-date stood at 0.67% and CCC gains at 0.8%.
• As investors rush back to the asset, U.S. high-yield funds saw an inflow for the week after outflows the two previous weeks.
• “The late November weakness in risk assets has come and gone, with sentiment reversing completely in December,” Barclays strategist Brad Rogoff wrote on Friday.
• In corporate cash markets, the high-yield to investment-grade spread has shrunk after the recent decompression, Barclays wrote in the note.
• The primary market was steady pricing deals to take the week’s tally to more than $5b.
• The broader junk bond yields rose 6bps to close at 4.46% but will end the week lower for the second time this month.
• The Single B index may see the biggest weekly gains in 12 months, with week-to-date returns of 0.72%.
• CCC yields closed at 7.06% and may end the week lower to see the biggest weekly drop in more than three months.

  (Wall Street Journal)  U.S. Jobless Claims Fall to Lowest Level in 52 Years

• Worker filings for unemployment benefits hit the lowest level in more than half a century last week as a tight labor market keeps layoffs low.
• Initial jobless claims, a proxy for layoffs, fell to 184,000 in the week ended Dec. 4, the lowest level since September 1969, the Labor Department said Thursday. That was close to a recent record total of 194,000 recorded in late November.
• The prior week’s level was revised up to 227,000. The four-week moving average, which smooths out weekly volatility, fell to 218,750.
• Unemployment claims have been steadily falling all year as the labor market has tightened. They have now fallen below where they were before the pandemic caused layoffs to surge in March 2020. Claims averaged 218,000 in 2019, the year before the pandemic hit the U.S.
• Economists say seasonal volatility around the holiday season may have contributed to last week’s low number.
• The decline in new claims is an indication that employers are reluctant to lay off workers as jobs are plentiful, consumer demand is high and the pool of prospective workers remains lower than before the pandemic.
• “We expect claims will start to more consistently hover around pre-Covid averages of 220,000 or perhaps slightly lower given current tight labor market conditions,” said Nancy Vanden Houten, lead economist at Oxford Economics.
• More unemployed workers should eventually get new jobs as they exhaust their benefits, she added.
• The unemployment rate fell to 4.2% in November from 4.6% in October, the Labor Department reported Friday. The share of people ages 25 to 54 who are either working or looking for work rose to 82.1% from 81.9%, a sign that prime-age Americans are starting to get back into the labor force. But the labor-force participation rate for that age group remains below where it was in February 2020, when it stood at 83.1%.
• “The overriding dynamic in the job market of late has been this shortage of workers,” said Mark Hamrick, senior economic analyst at Bankrate. “The issue of fresh job loss has not been key for many months now.”

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were $2.1 billion and year to date flows stand at -$2.2 billion.  New issuance for the week was $12.7 billion and year to date issuance is at $417.2 billion.

 (Bloomberg)  High Yield Market Highlights

• The riskiest part of the junk bond market is poised to post gains for the second consecutive week.  Should the current trend hold, CCCs will close the week as the best performing asset in high yield amid rate volatility and inflation anxiety.
• The broader junk bond index may also end the week with modest gains for the second straight week, with 0.04% largely propelled by CCCs.
• While risk assets managed to tune out macro concerns, “continued rate volatility could be a potential source of risk for valuations and at least create opportunities within credit”, Barclays strategist Brad Rogoff wrote on Friday.
• U.S. junk bond yields have come under pressure and have jumped 34bps since August to close at 4.18%; CCC yields rose 38bps to close at 6.53% as inflation fears took on momentum with the 5-year U.S. Treasury yields rising about 46bps in that period to close at a 20-month high of 1.243%.
• Investors assessed rising yields and falling prices, re-entering the market to pour cash into retail funds.
• U.S. high yield funds report an inflow of $2.1b this week, the biggest since April.
• The primary market remained healthy with $12.7b of issuance.

(Bloomberg)  Fed’s Quarles Urges November Taper and Warns of Inflation Risks

•  Federal Reserve Governor Randal Quarles said he favors an initial move to slow monetary stimulus next month and is concerned by a broadening of inflationary pressures that could require a policy response.
• “I would support a decision at our November meeting to start reducing these purchases,” he said in remarks prepared for a speech Wednesday to a Milken Institute conference in Los Angeles, referring to the central bank’s bond-buying program, which is currently running at $120 billion a month.
• Fed officials are getting ready to begin winding down the bond-buying program they put in place last year in the early days of the pandemic. They broadly agreed to start the process in either mid-November or mid-December, according to minutes of their last meeting on Sept. 21-22.
• Quarles said he agreed that current high inflation is “transitory,” and that the central bank is not “behind the curve” with its monetary policy. While price moves have been prompted by supply disruptions during the Covid-19 pandemic, the surges have lasted longer than expected and there has been a broadening of the number of items that have seen price surges, he said.
• “There is evidence in the past couple of months that a broader range of prices are beginning to increase at moderate rates, and I am closely watching those developments,” he said.
• Quarles’ prepared remarks didn’t give an explicit forecast for the timing of interest-rate liftoff. Projections published at the conclusion of the Fed’s September meeting showed officials were evenly split on whether increases in its benchmark interest rate, which is currently near zero, would be necessary next year.
• During a question and answer session, he said that “if we are still seeing 4% inflation or in that area next spring, then I think we might have to reassess the speed with which we would be thinking about raising interest rates.”
• Quarles’ position as Fed vice chairman of supervision expired earlier this month and the Fed Board in Washington decided not to have any single governor take that position while awaiting a fresh nomination by President Joe Biden.

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were -$1.2 billion and year to date flows stand at -$3.0 billion.  New issuance for the week was $5.2 billion and year to date issuance is at $404.4 billion.

(Bloomberg)  High Yield Market Highlights

• Junk bonds bounced back from a recent dip, taking a cue from equities, to post the biggest one-day gains in seven and yields saw the biggest decline in almost five weeks, ending the day at 4.19%.
• The junk bond index is poised to snap its three-week losing streak and post the biggest gains since mid-September, with week-to-date returns of 0.11%
• Gains were across the board as oil prices closed at a seven-year high of $81.31 on Thursday.
• Primary market resilience was evident as issuance continued at a steady pace.
• US. junk-bond investors, while continuing their search for yield, were demanding appropriate risk premium.
• Amid broader resilience, investors are growing cautious amid concerns about increasing volatility. That was evident in the lack of interest as debt-laden alarm company Monitronics International struggles to find enough buyers for its $1.1b 7-year notes, the inaugural bond offering since emerging from bankruptcy two years ago.
• These were slated to price earlier in the week.
• Investors also pulled cash from retail funds, with an outflow of $1.2b from U.S. high yield funds, the biggest since mid-June.
• The broader junk bond index spreads dropped 6bps to +295bps and posted gains of 0.29% on Thursday, the biggest one-day returns since March.
• Single B yields also dropped 12bps to close at 4.60%, the biggest decline in six weeks, and the index posted gains of 0.29%, also the biggest since March.

(CNBC)  Fed says it could begin ‘gradual tapering process’ by mid-November

• Federal Reserve officials could begin reducing the extraordinary help they’ve been providing to the economy by as soon as mid-November, according to minutes from the central bank’s September meeting released Wednesday.
• The meeting summary indicated members feel the Fed has come close to reaching its economic goals and soon could begin normalizing policy by reducing the pace of its monthly asset purchases.
• In a process known as tapering, the Fed would reduce the $120 billion a month in bond buys slowly. The minutes indicated the central bank probably would start by cutting $10 billion a month in Treasurys and $5 billion a month in mortgage-backed securities. The Fed is currently buying at least $80 billion in Treasurys and $40 billion in MBS.
• The target date to end the purchases should there be no disruptions would be mid-2022.
• The minutes noted “participants generally assessed that, provided that the economic recovery remained broadly on track, a gradual tapering process that concluded around the middle of next year would likely be appropriate.”
• “Participants noted that if a decision to begin tapering purchases occurred at the next meeting, the process of tapering could commence with the monthly purchase calendars beginning in either mid-November or mid-December,” the summary said.
• St. Louis Fed President James Bullard told CNBC on Tuesdaythat he thinks tapering should be more aggressive in case the Fed needs to rate interest rates next year to combat persistent inflation.
• At the September policymaking session, the committee voted unanimously to hold the central bank’s benchmark short-term borrowing rate at zero to 0.25%.
• The committee also released the summary of its economic expectations, including projections for GDP growth, inflation and unemployment. Members scaled back their GDP estimates for this year but upped their outlook for inflation, and indicated they expect unemployment to be lower than earlier estimates.
• In the “dot plot” of individual members’ expectations for interest rates, the committee indicated it could begin raising interest rates as soon as 2022. Markets currently are pricing in the first rate hike for next September, according to the CME FedWatch tool. Following the release of the minutes, traders increased the likelihood of a September hike to 65% from 62%.
• Officials, though, stressed that a tapering decision should not be seen as implying pending interest rate hikes.
• However, some members at the meeting showed concern that current inflation pressures might last longer than they had anticipated. Traders are pricing in a 46% chance of two rate hikes in 2022.
• “Most participants saw inflation risks as weighted to the upside because of concerns that supply disruptions and labor shortages might last longer and might have larger or more persistent effects on prices and wages than they currently assumed,” the minutes stated.
• The document noted that “a few participants” said there could be some “downside risks” for inflation as long-standing factors that have kept prices in check come back into play. The majority of Fed officials have been holding to theme that the current price increases are transitory and due to supply chain bottlenecks, and other factors likely to subside.
• Inflation pressures have continued, though, with a reading Wednesday showing that consumer prices are up 5.4% over the past year, the fastest pace in decades.