Author: Rich Balestra - Portfolio Manager

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were -$0.4 billion and year to date flows stand at -$1.8 billion.  New issuance for the week was $15.1 billion and year to date issuance is at $399.1 billion. 

(Bloomberg)  High Yield Market Highlights 

• The U.S. junk-bond market posted gains on Thursday, ending a three-day run of losses, and yields fell amid an onslaught of issuance.
• “Despite a recent pull back in valuations, the high-yield market remains relatively compressed. With dispersion at low levels, investors are finding it increasingly difficult to find opportunities in the secondary market,” Barclays strategist Brad Rogoff wrote in note on Friday.
• The primary market is crowded with debut issuers, companies borrowing after emerging from bankruptcy and LBOs.
• Amid reports of inflationary pressures, with the 5-year U.S. Treasury yield climbing to a 19-month high of 1.02%, the U.S. junk-bond index came under some modest pressure as it is headed a loss for the third consecutive week.
• Yields fell 5bps to close at 4.11% on Thursday and spreads closed at +293.
• The riskiest slice of the junk bond market, CCCs, posted gains on Thursday, the biggest one-day returns in two weeks.
• CCC yields dropped 12bps to 6.18%, a two-week low and the biggest one-day decline in three weeks.
• Junk bonds may stall as U.S. equity futures drift as investors await for key employment report for clues on the Federal Reserve’s monetary policy.

(The Wall Street Journal)  Biden Backs Powell After Warren Intensifies Opposition 

• President Biden said he has confidence in Federal Reserve Chairman Jerome Powell after Sen. Elizabeth Warren (D., Mass.) on Tuesday escalated her criticismof the central bank’s leader.
• “Thus far, yes,” Mr. Biden said when asked by a reporter during a trip to Michigan if he had confidence in Mr. Powell. “But I’m just catching up to some of these assertions,” he said, referring to senior officials’ trading activitiesthat sparked Ms. Warren’s most recent volley of disapproval.
• Biden gave no indication he has made a decision over whether to offer Mr. Powell a second term when his current one expires in February. Members of Mr. Biden’s economic team have supported keeping Mr. Powell. However, Ms. Warren’s vocal opposition has complicated Mr. Biden’s political calculus, as he tries to balance moderate and progressive demandson his signature domestic policy goals.
• Several members of both parties have also voiced supportin recent weeks for Mr. Powell’s renomination, giving him high marks for his response to the pandemic. Some Democrats have been heartened by his public comments that recent inflationary pressures, because they are being driven by temporary supply-chain disruptions, don’t require an immediate policy response from the Fed.
• But a vocal minority of Democrats, led by Ms. Warren, have called for his replacement and favor someone who would be more active in pressing the central bank to regulate banks and address climate-related risks. Ms. Warren last week told Mr. Powell at a hearing that his record favoring a lighter touch on banks made him a “dangerous man” to lead the Fed and that she would not support his nomination.
• Powell is a Republican who was first nominated to the Fed’s board 10 years ago by President Obama. He was named as Fed chairman by President Trump in 2018.

(Bloomberg)  Senate Passes Short-Term Boost in Debt Limit 

• The Senate approved legislation yesterday that pulls the nation from the brink of a first-ever payment default with a short-term debt-ceiling increase, breaking a weeks-long stalemate that rattled financial markets.
• The vote was 50-48, with no Republicans in favor of the measure that simply kicks the can toward another precarious debt-limit fight in less than two months. The $480 billion increase in statutory borrowing would run out around Dec. 3.
• The debt limit increase still needs a vote in the House. House Majority Leader Steny Hoyer (D-Md.) said last night the chamber will vote on the measure on Tuesday. It’s expected to pass there, and the White House said President Joe Biden looked forward to signing into law.
• Schumer and Minority Leader Mitch McConnell (R-Ky.) struck a deal for the legislation earlier yesterday. The timeline sets up a collision course where various fiscal and policy battles will play out roughly simultaneously.
• Funding for government operations also expires on Dec. 3, risking a government shutdown unless lawmakers can complete agency budgets for this fiscal year. Also, Democrats could be trying to push through Biden’s broad economic package around that time.
• Leading up to December, Republicans will again push Democrats to raise the debt ceiling on their own through the budget reconciliation process—unless Democrats agree to drop their up-to-$3.5 trillion social tax and spending bill, a cornerstone of Biden’s legislative agenda. Democrats have agreed to push back the deadline to December, but haven’t agreed to act the next time through reconciliation.
• That gives Democrats roughly eight weeks, if they choose to pursue the complex process they sought to avoid, to push a measure through equally-divided Senate committees and allow a lengthy series of floor votes sought by Republicans.

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were $0.7 billion and year to date flows stand at -$2.0 billion.  New issuance for the week was $12.7 billion and year to date issuance is at $363.5 billion.

 (Bloomberg)  High Yield Market Highlights 

• The riskiest segment of the market, CCCs, is poised to end the week as the best performing asset class, with gains of 0.33%, fueled by rising oil prices.
• The broader junk bond index is also set to post gains for fourth consecutive week, with returns of 0.16%
• Junk bond yields are still hovering well below 4%, closing at 3.76% on Thursday, just 23bps away from the all-time low of 3.53%
• It felt like the calm after a storm in the primary market with no new issues pricing or launching a roadshow on Thursday, after almost $13b priced, including the debut note sale of cryptocurrency trading platform Coinbase Global
• The junk bond calendar is steadily building up as investors make room for Medline Industries, the biggest leveraged buyout since the global financial crisis
• More borrowers are expected to tap the market as yields continue to drop and spreads tighten in the high yield market
• BB yields closed at 2.88%, just 2bps above the record low of 2.86%
• Spreads were at a 19-month low of +190bps
• Single B yields closed at 4.19%, down 1bp, and spreads tightened 4bps to +314bps
• U.S. equity futures slid and European stocks reversed gains as investors evaluated the resilience of the global economic recovery amid concerns from the Delta strain and risks from China.  Traders are waiting for August retail sales numbers, after China’s disappointing data yesterday, for cues on Federal Reserve’s taper plans. Meanwhile, oil is headed for a fourth weekly gain supported by signs of a tighter market and wider rally in energy prices.

(Bloomberg)  Gensler Turns Spotlight on Bond Prices 

• After U.S. Securities and Exchange Commission Chairman Gary Gensler signaled he may overhaul bond market regulations, industry experts zeroed in on just how opaque trading can be.
• Gensler, who testified Sept. 14 before the Senate Banking Committee, said in prepared remarks released beforehand that he wants to “bring greater efficiency and transparency” to the trading of corporate bonds, municipal bonds and mortgage-backed securities. He offered little detail on what new rules might look like.
• Market watchers have suggestions, a year after a liquidity breakdown early in the pandemic forced the Federal Reserve to backstop the bond market. A big source of angst: especially when compared with other key financial assets like stocks, it can take a lot more effort to figure out the price of a bond.
• “Pre-trade transparency is a focus,” said Kumar Venkataraman, a finance professor at Southern Methodist University and former member of the SEC’s Fixed Income Market Structure Advisory Committee. “If you’re a large, sophisticated investor, you receive quotes from many dealers and see the best price. If you’re less sophisticated, you might get a less competitive bid.”
• Currently, corporate bond trades must be reported to the Financial Industry Regulatory Authority’s Trace system no more than 15 minutes after they’re executed — a deadline that feels like an eternity in the era when stock and futures traders fret about microseconds.
• And before trades are placed, there are no publicly available price quotes. To get those can require making phone calls or sending electronic requests for quotes to a bunch of banks and brokers.
• A potential solution would require bond brokers to report their offered prices to a centralized system, which is how it’s worked in the U.S. stock market since the 1970s. That could make the business more efficient by stitching together all the different markets where bonds trade. In stocks, for instance, all orders are supposed to be automatically routed to the market with the best price.
• Sell-side banks have little incentive to provide greater transparency, since it could cut into their profits. And reporting quotes could be a costly and time-consuming process that banks currently have little interest in participating in, Venkataraman said.
• Don’t expect corporate bonds to begin trading in a centralized system like equities anytime soon, says Kevin McPartland, head of research for market structure at Coalition Greenwich.
• “The bond market is still very different from the equity market in terms of how it trades and in terms of the market participants,” he said. “Bond markets are by and large institutional markets. So we have a very informed consumer if you will.”
• The bond-market crisis of March and April 2020 is fresh in regulators’ minds. Government officials appear to view the unprecedented steps taken by the Fed in March 2020 as a mandate to address long-standing concerns that bond liquidity disappears in bad times.
• Gensler has targeted market transparency before. The opacity of the swaps market was one of the reasons why the 2008 financial crisis was so severe, since it was extremely difficult to untangle the connections between Wall Street banks who held the derivatives. Gensler, as chairman of the U.S. Commodity Futures Trading Commission, oversaw a push to get more of that business done on public markets.

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were $0.5 billion and year to date flows stand at -$5.2 billion.  New issuance for the week was $1.4 billion and year to date issuance is at $350.4 billion.

 (Bloomberg)  High Yield Market Highlights 

• The riskiest part of the junk bond market is on track to post the first weekly gains in seven weeks and the biggest in six months.  With the primary market at a virtual standstill, CCC yields may see the biggest weekly decline in almost three months as investors steadily reposition themselves following a brief sell-off.
• The broader U.S. junk bond index is poised to end three weeks of declines, and is on track to post the biggest weekly gains in more than two months
• The index yields may see the first weekly drop in seven weeks
• The CCC index gained on Thursday for the fifth straight session, with returns of 0.1%. The week-to-date returns stood at 0.62%, the biggest since February 5th
• Yields dropped 5bps to close at 6.42% yesterday and the week-to-date drop is 23bps
• Should the trend hold, it is likely to see the biggest weekly decline since May 28
• The overall index yield was unchanged on Thursday while it fell 15bps week-to-date, to make it the biggest in eight weeks
• The primary market is expected to resume business after the Labor Day holiday as the pipeline is expected to be jammed with buyout financings
• U.S. equity futures advanced and European stocks remained steady ahead of Chair Powell’s speech at the Jackson Hole symposium later today to see if he offers any clues about the timeline for tapering bond purchases. Oil, meanwhile, is headed of the biggest weekly gain in 11 months as focus shifted to the storm that menacing the Gulf of Mexico

(Bloomberg)  S&P Sees Junk Bond Defaults Vanishing Amid Recovery, Easy Money 

• Missed debt payments by junk-rated borrowers look set to become increasingly rare amid cheap borrowing conditions and economic recovery, according to S&P Global Ratings.
• The U.S. speculative-grade corporate default rate could fall to as low as 2% by the middle of next year on a trailing 12-month basis, from 3.8% this June, according to a report by S&P. That’s the optimistic scenario, which would be the lowest level of defaults since 2015. It compares to a 2.5% baseline and 5.5% pessimistic forecast for June 2022 by S&P.
• The junk bond default rate peaked at 6.7% in December — the highest since 2010 — after lockdowns caused by the pandemic. Most borrowers are now able to cover debt payments amid favorable lending and better operating conditions, according to the S&P analysts led by Nick Kraemer, head of ratings performance analytics.
• In the second quarter, there were only 11 defaults, the fewest since the third quarter of 2018. The number of speculative-grade upgrades outpaced downgrades by about 3-to-1 in 2021, according to the report published Aug. 20.
• The delta variant could test borrowers, especially in sectors hit hardest by Covid-19, like entertainment and travel. Energy, consumer and service companies — which led the second quarter with the most defaults — are also at risk, though they are expected to broadly recover in 2022.

(The Wall Street Journal)  Western Digital in Advanced Talks to Merge With Kioxia

• Western Digital is in advanced talks to merge with Japan’s Kioxia Holdings Corp., according to people familiar with the matter.
• Long-running discussions between the companies have heated up in the past few weeks and they could reach agreement on a deal as early as mid-September, the people said. Western Digital would pay for the deal with stock and the combined company would likely be run by its Chief Executive, David Goeckeler, the people said.
• There’s no guarantee Western Digital, which had a market value of around $19 billion Wednesday afternoon, will seal an agreement, and Kioxia could still opt for an initial public offering it had been planning or another combination.
• The Wall Street Journal reported in March that Western Digital and Micron Technology were examining potential deals with Kioxia, which makes NAND flash-memory chips used in smartphones, computer servers and other devices. Micron’s interest has since cooled and Kioxia has been focused on discussions with Western Digital, which already has deep existing ties with the Japanese company.
• Western Digital, which makes hard disk drives, solid-state drives and NAND chips, has a joint venture with Kioxia for manufacturing and research and development that was set to expire starting in 2027. That agreement appears to have given Western Digital a leg up on Micron, and their existing ties could help make a WD-Kioxia combination more palatable to regulators.
• Kioxia, formerly part of Toshiba and known as Toshiba Memory, was purchased in 2018 by a group led by private-equity firm Bain Capital.

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were $0.9 billion and year to date flows stand at -$5.7 billion.  New issuance for the week was $7.8 billion and year to date issuance is at $348.9 billion.

(Bloomberg)  High Yield Market Highlights

• S. junk bonds are headed for a third straight week of losses, the longest such streak in five months, while the cost of borrowing has jumped. Yields have risen to a more than three-month high of 4.19% amid concerns about the spread of the delta variant and its impact on economic growth, and on expectations that the Federal Reserve will soon scale back bond purchases.
• CCCs, the riskiest junk bonds, have lost 0.19%, and are on track for the seventh consecutive week of losses. Yields soared 31bps Thursday, the biggest one-day jump in more than three months, to a five-month high of 6.63%
• Borrowers have retreated amid market volatility after selling more than $33b this month, according to data compiled by Bloomberg
• Yields on the broader junk-bond index rose 8bps to 4.19% Thursday, and are poised to end higher for the six straight week, the longest stretch since July 2015, the Bloomberg-compiled data show
• Losses amount to 0.12% this week
• CCC yields have jumped 66bps this month to a five-month high of 6.63%
• Markets are fragile again Friday with a key measure of high-yield credit risk higher, and U.S. equity futures lower as faltering growth and China’s regulatory curbs compound risks before the Fed’s Jackson Hole symposium next week. Oil is headed for its longest run of daily declines since 2019 on worries about global energy demand

(Bloomberg)  Fed Minutes Show Most Officials See Taper Starting This Year

• Most Federal Reserve officials agreed last month they could start slowing the pace of bond purchases later this year, judging that enough progress had been made toward their inflation goal, while gains had been made toward their employment objective.
• “Various participants commented that economic and financial conditions would likely warrant a reduction in coming months,” minutes of the Federal Open Market Committee’s July 27-28 gathering, released Wednesday, said. “Several others indicated, however, that a reduction in the pace of asset purchases was more likely to become appropriate early next year.”
• The minutes also showed that most participants “judged that it could be appropriate to start reducing the pace of asset purchases this year.”
• S. central bankers next meet September 21-22. While the record shows that they don’t yet have agreement on the timing or pace of tapering asset purchases, most had reached consensus on keeping the composition of any reduction in Treasury and mortgage-backed securities purchases proportional.
• Policy choices going forward are also likely to be influenced by new appointees to the Fed Board as the Biden administration moves to fill as many as four positions by early 2022.
• Fed policy makers have differed publicly in the weeks since the meeting over when the central bank should start tapering, with some, like Minneapolis Fed President Neel Kashkari, wanting to a see a “few more” strong jobs reports and others, such as Boston Fed President Eric Rosengren, saying he’s open to announcing plans for a reduction at the next meeting if employment figures come in well.
• Fed officials cut their benchmark lending rate to zero in March 2020 and announced they would buy $200 billion of agency mortgage-backed securities and $500 billion of Treasuries to support market functioning. By December 2020, they realigned their guidance saying they would purchase $80 billion a month in Treasuries and $40 billion a month on mortgage securities “until substantial further progress has been made toward its maximum employment and price stability goals.
• The asset purchases have lowered longer-term interest rates and helped fuel a rise in housing prices and other financial assets, with one-month gains in home price indices breaking records while stock indexes trade around record highs.

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were -$0.1 billion and year to date flows stand at -$7.1 billion.  New issuance for the week was $16.9 billion and year to date issuance is at $327.1 billion.

 (Bloomberg)  High Yield Market Highlights

• The rally in the U.S. junk-bond market appears to be losing steam as CCCs, the riskiest segment in high yield, is poised to post a negative return of 0.35% for the week, which would be the biggest such loss in more than nine months. The five straight weeks of losses have been the longest losing streak since November 2018.
• CCC yields rose 28bps in the last four sessions to 6.25%, and are on track to see the biggest weekly jump in almost three months
• Junk bond investors pulled cash from retail funds, and the funds have seen cash leak in six of the last 10 sessions
• The broader junk bond index is also set to post negative returns for the week, with 0.19%, the biggest weekly decline in more than two months
• That investors were getting wary was evident with BB rated bonds accounting for about 75% of the total bond sales this week
• Investors, though cautious, were not risk averse as almost $17b of new bonds are set to price this week
• The index yields rose 14bps week-to-date to close 4.02%, still low and attractive for borrowers

(Bloomberg)  Clarida Sees 2021 Taper Announcement, 2023 Fed Rate Liftoff

• • Federal Reserve Vice Chairman Richard Clarida said the central bank is on course to pull back on the massive support it is providing to the pandemic-damaged economy, starting with an announcement later this year that it is paring bond purchases and moving on to a liftoff in interest rates in 2023.
  • While acknowledging that the rapid spread of the Delta virus posed a downside risk to the economy, Clarida on Wednesday painted an upbeat picture of the outlook in the coming years as growth powers ahead and inflation falls back from its recent elevated levels.
  • The “necessary conditions for raising the target range for the federal funds rate will have been met by year-end 2022,” paving the way for a lift-off from near-zero rates in 2023
  • His comments helped to harden wagers in the money markets for an initial rate hike in early 2023, after they wavered earlier on news of a marked slowdown in private sector hiring last month
  • The Fed has said it will keep short-term interest rates pinned near zero until the labor market has reached maximum employment and inflation has risen to 2% and is on track to moderately exceed that level for some time. In economic projections released in June, a preponderance of policy makers penciled in two interest-rate hikes by the end of 2023
  • The economy has forged ahead strongly this year, after swooning in 2020 amid the pandemic. Gross domestic product rose at a 6.5% annualized rate in the second quarter, following a 6.3% gain in the first three months of the year
  • “The monetary and fiscal policies presently in place should continue to support the strong expansion in economic activity that is expected to be realized this year, although, obviously, the rapid spread of the Delta variant among the still considerable fraction of the population that is unvaccinated is clearly a downside risk for the outlook,” Clarida said
  • If growth does stay strong, Clarida said he’d be in favor of the Fed making an announcement later this year that it will begin to scale back its bond purchases
  • The Fed is currently buying $120 billion of assets per month — $80 billion of Treasury securities and $40 billion of mortgage backed debt — and has pledged to keep up that pace “until substantial further progress” has been made toward its goals of maximum employment and 2% inflation.

(Bloomberg)  U.S. Job Growth Exceeds Forecast as Unemployment Rate Falls

• • S. employers added the most jobs in nearly a year and the unemployment rate declined faster than forecast, showing the labor market is making more robust gains toward a full recovery.
  • Payrolls climbed by 943,000 last month after an upwardly revised 938,000 increase in June, a Labor Department report showed Friday. The median estimate in a Bloomberg survey of economists called for a 870,000 gain. The unemployment rate dropped by a half percentage point to 5.4%.
  • The dollar and 10-year Treasury yields advanced while stock futures erased gains as traders bet a strengthening labor market will lead Federal Reserve officials to begin pulling back monetary support, including bond buying.
  • A resurgence in economic activity has sparked a surge in labor demand — particularly in the leisure and hospitality industry — since the beginning of the year. At the same time, payrolls remain 5.7 million short of pre-pandemic levels and many employers have struggled to fill a record number of vacant positions.
  • The figures mark a big step toward the Fed’s goal of “substantial” further progress in the labor market recovery. Fed officials including Chair Jerome Powell and Governor Lael Brainard have indicated the labor-market recovery had some way to go before the central bank could begin tapering asset purchases.
  • Fed Governor Christopher Waller said this week that if the next two monthly employment reports show continued gains, he could back such a move.

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were $1.0 billion and year to date flows stand at -$6.0 billion.  New issuance for the week was $0.8 billion and year to date issuance is at $286.8 billion.

 (Bloomberg)  High Yield Market Highlights

•  The U.S. junk bond primary market finally emerged from its post-holiday malaise with Jaguar Land Rover set to sell $500 million of 8-year bonds as soon as today.
• The U.S. junk bond market is poised to post gains for the third consecutive week, with returns of 0.16%
• Barclays revised the spread and returns forecast for high yield as the macro backdrop changed with vaccine rollout, fiscal stimulus and overall growth environment
• High yield index spreads will end the year at 275-300bps, revised from 250-375. The total returns will be 4%-4.5%, from 3.5%-4.5%, Brad Rogoff wrote in a note on Friday
• After a relentless rally plunged junk bond yields to all- time lows across ratings, the market stalled yesterday following fluctuating equities and volatile oil prices amid concerns how the clashes inside OPEC+ will play out
• Yields rose for the second straight session to close at 3.67% after setting a record low of 3.53% earlier in the week. The yields were up 8bps, the biggest one-day jump in seven weeks. Spreads closed at +271bps, also up 8bps
• The broader index came under pressure after a long rally as equities fell to post a modest loss of 0.11% on Thursday. The market is ending the week with gains of 0.16%
• CCC yields also rose for the second straight session to close at 5.48%, up 7bps. It hit a new low of 5.15% on July 6. The index posted a loss of 0.19% on Thursday and is expected to end the week with a loss of 0.04%

(The Wall Street Journal)  Borrowing Is Back as Sign-Ups for Auto Loans, Credit Cards Hit Records

•  Americans are borrowing again, in some cases at levels not seen in more than a decade.
• Consumer demand for auto loans and leases, general-purpose credit cards and personal loans was up 39% in April compared with the same period last year, according to credit-reporting firm Equifax It was also up 11% compared with April 2019, according to Equifax, which measured how often lenders checked consumers’ credit reports to make loan decisions.
• Lenders are meeting the moment. Equifax said lenders extended a record number of auto loans and leases in March, the latest month for which data are available. They also bumped up credit-card originations, issuing more general-purpose credit cards than any other March on record. Equifax’s data goes back to 2010.
• With vaccinations readily available in the U.S. and the economy reopening, many Americans are splurgingon cars, vacations and eating out. Higher prices, especially for cars and trucks, have also stoked loan demand.
• “There’s a significant increase in consumer-credit demand and a growing appetite to use credit on things like those vacations that were postponed for 18 months,” said Tom Aliff, senior vice president of analytics consulting at Equifax.

(Bloomberg)  Oil Prices in Flux While OPEC+ Remains Deadlocked on Supply

• Oil prices continued to swirl as traders tried to fathom how the clash inside the OPEC+ alliance will play out in global markets.
• Early in the week, U.S. crude soared to a six-year high near $77 a barrel on fears that OPEC’s failure to agree a production increase would leave markets desperately tight. But the gains soon fizzled on concern that the dispute between Saudi Arabia and the United Arab Emirates could splinter the entire alliance and undo its production cuts agreement.
• Futures advanced 0.9% on Friday, gaining in tandem with other commodities. Nonetheless, crude is down 2.1% for the week and the main focus for traders in coming days will be whether the Organization of Petroleum Exporting Countries and its partners can repairs its split.
• Before talks broke down on Monday, Saudi Arabia proposed that the coalition gradually revive the 5.8 million barrels of daily capacity it still has off-line in monthly installments of 400,000 barrels through to the end of next year. But the UAE blocked an agreement, saying it will only support an extension of the pact if there are revisions to its own quota, which the country contends is outdated.
• The existing OPEC+ agreement states that output remains steady next month. That could cause world markets to tighten sharply, with forecasters such as Goldman Sachs Group Inc. warning the shortfall will amount to several million barrels a day.
• Yet the longer the dispute goes unresolved, traders are reckoning with another possible outcome: that the UAE follows through on veiled threats to quit OPEC, which could cause the entire alliance to dissolve into a production free-for-all reminiscent of last year’s Saudi-Russia price war.
• “The OPEC+ impasse could turn sour,” analysts at market intelligence firm Kpler Ltd. said in a report. “While the prospect of a non-agreement sounds like a bullish scenario, the less likely bearish scenario where OPEC+ tumbles and goes back to a free-for-all remains on the table.”

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were $0.7 billion and year to date flows stand at -$7.1 billion.  New issuance for the week was $7.2 billion and year to date issuance is at $286.0 billion.

(Bloomberg)  High Yield Market Highlights

• The U.S. junk-bond market’s riskiest slice of debt saw yields plunge to the lowest level on record Thursday as a fierce rally continued to roar full steam ahead across the high-yield ratings spectrum. CCC yields fell to 5.60% while spreads tightened to +456bps.
• Broader index yields dropped to 3.72% to reach a new low for the fifth time in about five months, while spreads rallied to +265bps, the lowest since June 21, 2007
• Single B yields closed at 4.04%, also a record, while spreads were +292bps, the tightest in about 14 years
• The primary market is expected to be quiet Friday as borrowers wait to strike until after the Fourth of July weekend
• Retail investor confidence was evident in fund-flow data as there was an inflow of $700mm for the week, which was the biggest influx since April
• S. equity futures have climbed ahead of key jobs data while oil was steady after infighting within OPEC+ delayed a decision on raising output levels

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were -$0.9 billion and year to date flows stand at -$8.9 billion.  New issuance for the week was $13.5 billion and year to date issuance is at $274.2 billion. 

(Bloomberg)  High Yield Market Highlights 

• U.S. junk bonds remained relatively steady Thursday amid a retreat in the reflation trade that has dominated markets for the majority of this year. The broader high-yield index is poised to see a modest weekly loss of 0.03% — its first decline in four weeks — as investors also weigh the Federal Reserve’s signals that it’s ready to withdraw stimulus.
• The index posted a small loss of 0.07% for the second consecutive session while yields rose 5bps to close at 3.94%
• The primary market was quiet Thursday amid the market reordering, which has seen commodities dip for five-straight sessions and Brent crude slip from this week’s 2018 high
• Borrowers are expected to remain in wait-and-see mode and issuance is likely to be subdued ahead of the weekend.
• Equity futures are mixed this morning Oil, meanwhile, also extended its decline, with prices falling below $71 a barrel as fears of earlier than expected rate hike derailed bets on commodities

(Wall Street Journal)  Fed Pencils In Earlier Interest-Rate Increase 

• Federal Reserve officials signaled they expect to raise interest rates by late 2023, sooner than they anticipated in March, as the economy recovers rapidly from the effects of the pandemic and inflation heats up.
• Their median projection showed they anticipate lifting their benchmark rate to 0.6% from near zero by the end of 2023. In March they had expected to hold it steady through that year.
• Fed officials also discussed an eventual reduction, or tapering, of the central bank’s bond-buying program, Chairman Jerome Powell said at a press conference after the central bank’s two-day policy meeting. The timing of such a move remains uncertain, he added.
• Prompting the policy shift is a much stronger economic rebound and hotter inflation than the Fed anticipated just a few months ago.
• “Progress on vaccinations has reduced the spread of Covid-19 in the United States,” the Fed said in a statement following the meeting. “Amid this progress and strong policy support, indicators of economic activity and employment have strengthened.”
• In updated projections released Wednesday, 13 of 18 officials indicated they expect to lift short-term rates by the end of 2023, up from seven who expected that outcome in March. In March, most of them anticipated holding rates steady through 2023.
• The Fed has its benchmark federal-funds rate steady since March 2020, when the effects of the pandemic caused the sharpest economic contraction in generations. The central bank also has been purchasing at least $120 billion a month of Treasury and mortgage bonds since June 2020 to hold down longer-term borrowing costs, providing further support to the recovery.
• The Fed reiterated that it expects to continue bond purchases until “substantial further progress” has been made in the recovery, counting from December 2020.
• Fed officials want the economy to get closer to their goals of “maximum employment” and sustained 2% inflation before reducing the bond purchases. They have said they want to fully achieve those objectives before they raise interest rates.
• “Honestly the main message I would take away from the [forecasts] is that participants—many participants—are more comfortable that the economic conditions in the committee’s forward guidance could be met somewhat sooner than anticipated,” Mr. Powell said. “That would be a welcome development.”
• He said meeting the standard for reducing bond purchases remains “a ways away.” But he added that the economy is making progress toward the Fed’s goals and that policy makers will be assessing the appropriate time to begin scaling back the purchases at coming meetings.
• “You can think about this meeting that we had as the ‘talking about talking about tapering,’ if you like,” Mr. Powell said.

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were -$0.4 billion and year to date flows stand at -$6.2 billion.  New issuance for the week was $11.9 billion and year to date issuance is at $247.8 billion. 

(Bloomberg)  High Yield Market Highlights 

• U.S. junk bonds are set to post gains for the eighth consecutive month after nearly $47 billion of sales have already made for the busiest May ever for new issuance.
• CCCs, the riskiest bracket in high-yield, are on track to record gains for the 14th straight month — the longest positive stretch since a 16-month streak ended September 1992, according to data compiled by Bloomberg
• The CCC tier is also poised to end May as the best-performing segment of the market for the sixth straight month with returns of 0.6%
• Barclays strategist Brad Rogoff wrote in note on Friday that spreads are close to recent tights and are well supported in the near term by the current technical and fundamental backdrop
• He cautioned, however, that in the longer term, the eventual withdrawal of extraordinary monetary and fiscal stimulus will be a potential risk for valuations
• Despite remaining on a pursuit for yield, investors still pulled money from U.S. high yield funds for the week. This was the fourth straight week of outflows from junk- bond retail funds
• The broader index posted gains again on Thursday and is expected to notch returns of 0.22% for the month, the eighth straight month of gains
• Yields closed flat at 4.11%, while spreads were at +302bps 

(Bloomberg)  U.S. Home Prices Surge Most Since 2005, Fueled by Low Rates 

• U.S. home prices surged the most since the end of 2005 as a shortage of properties to buy fueled bidding wars.
• Nationally, the S&P CoreLogic Case-Shiller index of property values climbed 13.2% in March from a year earlier, the biggest gain since December 2005. That came after a jump of 12% in February.
• Home prices in 20 U.S. cities gained 13.3%, meanwhile, beating the median estimate in a Bloomberg survey of economists. It was the biggest jump since December 2013.
• The real estate market has been surging for the past year as Americans seek properties in the suburbs, with low mortgage rates driving the rally. A dearth of available properties has also helped push up prices.
• “These data are consistent with the hypothesis that Covid-19 has encouraged potential buyers to move from urban apartments to suburban homes,” said Craig J. Lazzara, global head of index investment strategy at S&P Dow Jones Indices. “This demand may represent buyers who accelerated purchases that would have happened anyway over the next several years.”
• Phoenix (20%), San Diego (19.1%) and Seattle (18.3%) posted the biggest increases among the 20 cities tracked by Case-Shiller.