Author: Rich Balestra - Portfolio Manager

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were $3.3 billion and year to date flows stand at -$45.8 billion.  New issuance for the week was nil and year to date issuance is at $71.2 billion.

(Bloomberg)  High Yield Market Highlights

• The U.S. junk bond market is headed for the fifth week of gains after steadily edging higher for seven consecutive sessions, extending the July rally after a report eased concerns of an economic slowdown. This would be the longest gaining streak since December.  The week-long US junk-bond rally spurred telecom company Charter Communications to sell new bonds to bring some life back into the dormant primary market.
• Charter Communications rushed in to take advantage of the risk- on mood to sell bonds to fund a stock buyback, among other things. Investors, hungry for new bonds in an issuance-starved market, flooded it with orders for more than $4b for a $1b offering.
• The bonds priced at 6.375%, the lower end of talk. Bankers, led by Morgan Stanley, increased the size of the bond sale by $500m to $1.5b.
• The broader U.S. junk bond rally was due to a combination of factors.
• One, easing concerns about fears of an imminent recession following economic data earlier this week. S&P Global Ratings’ US chief economist Beth Ann Bovino echoed this sentiment and wrote that while macro economic conditions deteriorated or slowed down, there were no signs of an imminent recession yet.
• Two, investors have given their vote of confidence to the asset class as they flood US junk bonds with new cash. US high-yield funds saw an influx of over $3b for week.
• Three, the rally comes amid expectations that after perhaps another 75bps increase in the benchmark interest rate, the Federal Reserve will slow down the aggressive campaign of hiking rates while still curbing inflation and not causing a deep recession.
• U.S. junk bonds posted gains of 0.36% on Thursday and are on track to rally for the fifth straight week, with gains of 0.87% week-to- date.
• Yields dropped to a new eight-week low of 7.55% and spreads at +441.
• The gains spanned across all high-yield ratings, with CCCs posting gains of 0.65% on Thursday and is poised to be the best asset class for the week, with week-to-date returns of 1.72%.

(Bloomberg)  What Recession?

• The U.S. junk bond market is forecasting that the economy may weaken, but won’t tip into a recession.
• It comes as Federal Reserve officials vow to continue to fight inflation aggressively, even if higher rates increase the risk of recession. And some strategists and money managers think credit markets aren’t paying enough attention to how bad the potential upcoming downturn could be.
• But for now, investors are voting with their dollars. High-yield bonds gained 5.9% in July, their biggest one-month rally in a decade, and also rose in the first three days of August, according to Bloomberg index data.
• Risk premiums for the bonds stand at levels not usually associated with recessions. Stocks, junk bonds, and other risk markets rallied in the second half of July as investors grew more hopeful that signs of slowing growth would translate to the Fed easing up on its plans to tighten the money supply. A JPMorgan Chase model said this week that equity, credit and rates markets are together assigning a 40% probability to recession, down from 50% in June.
• Signs of slowing growth are coming from multiple areas. Walmart last week said shoppers are avoiding big-ticket items and focusing instead on buying groceries. AT&T said some customers are delaying paying bills. Pending home sales fell in June by the most since April 2020, according to a report last week.
• In markets, the 10-year Treasury yield was 38 basis points below the 2-year on Aug. 3, the most inverted since August 2000. Persistent inversions can signal a recession is coming. Commodities prices have broadly been falling this month, too.
• Riskier parts of the credit spectrum are also showing some concern. CCC rated bonds, among the lowest-rated corporates, gained 4.95% in July, while BB securities, the top tier of high yield, rose 6.1% on a total return basis.
• But it’s not clear if these signs of trouble will translate to a serious downturn.
• “The high-yield market is definitely pricing in some level of stress, but it’s pricing in nowhere near recession-type levels,” Citigroup strategist Michael Anderson said in a phone interview.
• Between December 1996 and December 2021, there were 28 months when the economy was in recession, according to an analysis by Martin Fridson, chief investment officer at Lehmann Livian Fridson Advisors. The median junk-bond spread during those months was about 835 basis points, or 8.35 percentage points, based on ICE BofA indexes. That spread is currently closer to 454 basis points on August 3, around the median level for non-recession months, according to his analysis.

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were $4.4 billion and year to date flows stand at -$49.1 billion.  New issuance for the week was $0.7 billion and year to date issuance is at $71.2 billion.

(Bloomberg)  High Yield Market Highlights

• U.S. junk bonds are headed toward the biggest monthly gains in more than a decade as the July rebound solidified after Chair Jerome Powell signaled that rate hikes would slow at some point and policy wasn’t pre-determined. The month-to-date return was 5.11%, the biggest since October 2011. Yields tumbled 98bps to close at a seven-week low of 7.91%, the first monthly drop in 2022.
• The U.S. high yield market shrugged off the 75bps increase in the benchmark US interest rate for the second straight month, and the warning by the central bank that “another unusually large increase could be appropriate at our next meeting, that is a decision that will depend on the data”.
• The riskiest segment of the junk bond market, CCCs, is poised for the biggest monthly advance since November 2020, with gains of 3.96% month-to- date.
• CCC yields plunged 75bps month-to-date to fall below 13% and close at 12.88%, the biggest monthly drop since December 2020 and also the first monthly decline in 2022.
• U.S. high yield investors flooded the asset class as the junk bonds reported a cash inflow of over $4 billion for the week. It was the biggest weekly intake since June 2020.
• The market appeared to interpret Chair Powell’s press conference as “dovish,” with futures pricing in a lower terminal rate than even the Fed’s own projections, Barclays strategists Brad Rogoff and Dominique Toublan wrote on Friday.
• Amid continuing macro uncertainty, the primary market has ground a near halt. The market priced a mere $1.8b, the slowest July since at least 2006.
• Year-to-date supply stood at almost $70b, the lowest since 2008.

(Bloomberg)  Powell Signals More Hikes Coming, While Markets Detect Pivot

• Chair Jerome Powell said the Federal Reserve will press on with the steepest tightening of monetary policy in a generation to curb surging inflation, while handing officials more flexibility on coming moves amid signs of a broadening economic slowdown.
• Policy makers again raised the benchmark US interest rate 75 basis points on Wednesday to a range of 2.25% to 2.5% and said they anticipate “ongoing increases” will be appropriate.
• Just how much depends on how the economy performs, the central bank chief said. He stepped away from the specific guidance on the size of upcoming hikes he previously gave, though he didn’t take another jumbo move off the table.
• “While another unusually large increase could be appropriate at our next meeting, that is a decision that will depend on the data,” Powell said. “The labor market is extremely tight, and inflation is much too high.”
• Despite the whatever-it-takes message, markets staged a powerful rally with the S&P 500 stock index rising 2.6%, keying off Powell’s remarks that the pace of rate increases would slow at some point and that policy won’t be pre-determined.
• But Powell didn’t flag a pivot to lower rates or even a pause, according to Fed watchers, who argued there was a disconnect between what the central banker said and how markets responded.
• “We heard plenty of hawkish signals, including refusal to even contemplate that we are in a recession with strong job market gains and many references that restoring price stability is being prioritized over sidestepping a recession,” said Jonathan Millar, an economist with Barclays Plc. “Powell does not seem to be ruling out 100 or 75 basis-point hikes in September — it’s data dependent.”
• Central bankers are trying to tame the highest inflation in 40 years. Although the latest shift toward a more real-time approach to policy, Powell is trying to convey that the Fed will keep pushing borrowing costs higher as long as prices continue to jump too fast for comfort.
• Interest-rate markets are pricing a more benign hiking cycle than the Fed’s own June forecasts, which Powell pointedly said was the best current guide to the where officials see policy heading.
• Investors are betting that rates will peak around 3.3% this year before the Fed starts cutting modestly in 2023. Officials in June projected rates at 3.4% at year-end and 3.8% in December 2023.
• “By referencing the June Summary of Economic Projections he is not validating market pricing,” said Bloomberg’s chief U.S. economist Anna Wong. “The Fed is nowhere close to declaring victory over inflation.”
• In the post-meeting press conference, Powell was clear about the committee’s bias. “Restoring price stability is just something that we have to do,” he told reporters.
• “We do see that there are two-sided risks,” he said. “There would be the risk of doing too much and imposing more of a downturn on the economy than was necessary, but the risk of doing too little and leaving the economy with this entrenched inflation — it only raises the cost.”
• He said it wasn’t the committee’s intention to tip the economy into a recession, while noting that to achieve their 2% inflation goal slack would have to increase. That means unemployment would have to rise somewhat, while the economy would have to slow to below its full potential.

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were -$0.4 billion and year to date flows stand at -$53.5 billion.  New issuance for the week was $0.7 billion and year to date issuance is at $70.4 billion.

(Bloomberg)  High Yield Market Highlights

• US junk bonds are headed toward the biggest weekly gains in almost two months, with a 1.97% return, after a steady five-day rally on broad expectations that the Federal Reserve will ease its rate-hike campaign after a potential 75bps-100bps hike in the next meeting. This would be the third straight week of gains and the longest streak since December. The rally enabled CCCs, the lowest tier of the junk bond market, to reverse last week’s losses and post the biggest weekly returns since May 27. CCC yields fell 49bps this week to 13.12%, a three week low.
• The comeback was across ratings. BBs and single Bs were all on track to end the week with the biggest gains in almost two months.
• Junk bond yields have plunged 39bps week-to-date to 8.17%, the biggest such drop in eight weeks, after steadily declining for five consecutive sessions.
• Whether this resurgence from the worst June performance will be sustained would be put to test after the next week’s FOMC meeting.
• The primary remained quiet as borrowers were on a wait-and-watch mode ahead of the next Fed meeting.
• July issuance volume was a mere $1.06b and year-to-date volume was a modest $70b.
• While the junk-bond market has edged higher all week, investors still appear to be withdrawing money from high-yield funds.
• US junk bonds have seen outflows in seven of the last 10 weeks.
• The junk rally may pause on Friday, taking its cue from choppy equity markets. US equity futures fluctuated as European stocks swung between gains and losses as investors looked to second-quarter earnings season to gauge how companies are weathering the impact of surging prices.

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were -$3.4 billion and year to date flows stand at -$44.0 billion.  New issuance for the week was $0.9 billion and year to date issuance is at $68.9 billion.

(Bloomberg)  High Yield Market Highlights

• U.S. junk bonds are headed toward the fourth straight weekly loss as investors pull cash out of high-yield funds amid growing concerns that the economy is headed toward a recession. Yields are hovering near a two-year high of 8.56% and spreads at a 21-month high of +525bps.  Barclays Plc’s Brad Rogoff said in a note Friday that high inflation will likely cause the fundamentals supporting the high-yield market to “deteriorate,” putting pressure on “lower-margin or more-leveraged companies.”
• “The average weighted debt to EBITDA leverage for CCCs is 10.5 times, with 1.8x interest cover indicating unsustainable capital structures over the next two years,” S&P Global wrote on Thursday. CCC yields were close to breaching the 13% level and spreads were near distressed levels, closing at +966bps as tightening financial conditions fuel worries about default risk.
• U.S. high yield funds saw an outflow for week.
• The junk bond primary market was virtually nonexistent amid rising yields and fears of slowing economic growth. Month-to-date issuance is at a modest $9.25b, making it the slowest June in more than a decade.
• JPMorgan revised its junk-bond supply forecast for 2022 to $175b from the earlier estimate of $425b made in November.

(Bloomberg)  Powell Says Soft Landing ‘Very Challenging,’ Recession Possible

• Federal Reserve Chair Jerome Powell gave his most explicit acknowledgment to date that steep rate hikes could tip the US economy into recession, saying one is possible and calling a soft landing “very challenging.”
• “The other risk, though, is that we would not manage to restore price stability and that we would allow this high inflation to get entrenched in the economy,” Powell told lawmakers on Wednesday. “We can’t fail on that task. We have to get back to 2% inflation.”
• The Fed chair was testifying before the Senate Banking Committee during the first of two days of congressional hearings. In his opening remarks, Powell said that officials “anticipate that ongoing rate increases will be appropriate,” to cool the hottest price pressures in 40 years.
• “Inflation has obviously surprised to the upside over the past year, and further surprises could be in store. We therefore will need to be nimble in responding to incoming data and the evolving outlook,” he said.
• Powell’s remarks reinforced comments at a press conference last week after he and his colleagues on the Federal Open Market Committee raised their benchmark lending rate 75 basis points — the biggest increase since 1994 — to a range of 1.5% to 1.75%.
• “We understand the hardship high inflation is causing,” Powell said Wednesday. “We are strongly committed to bringing inflation back down, and we are moving expeditiously to do so.”
• “Financial conditions have tightened and priced in a string of rate increases and that’s appropriate,” Powell said in response to a question following his opening remarks. “We need to go ahead and have them.”
• The Labor Department’s consumer price index rose 8.6% last month from a year earlier, a four-decade high. University of Michigan data showed US households expect inflation of 3.3% over the next five to 10 years, the most since 2008 and up from 3% in May.
• The rising cost of living has angered Americans and hurt the standing of President Joe Biden’s Democrats with voters ahead of November congressional midterm elections.
• Fed officials have admitted that they were too slow to tighten and are now trying to front-load rate increases in the most aggressive policy pivot in decades.
• While a recession isn’t in the Fed’s forecast, economists are increasingly flagging the likelihood of a downturn sometime in the next two years.
• Former New York Fed President Bill Dudley said in a Bloomberg Opinion column Wednesday that a recession is “inevitable” within the next 12 to 18 months. An economist at the Fed, Michael Kiley, said in a paper Tuesday that the risk of a large increase in the unemployment rate is above 50% over the next four quarters, based on a simulation incorporating inflation data, unemployment, corporate bond yields and Treasury yields.
• While he said that he did not see the likelihood of a recession as particularly elevated right now, he said that it was “certainly a possibility. It is not our intended outcome at all,” noting that events in the last few months have made it harder for the Fed to lower inflation while sustaining a strong labor market.
• A soft landing “is our goal. It is going to be very challenging. It has been made significantly more challenging by the events of the last few months — thinking there of the war and of commodities prices and further problems with supply chains.”
• “The tightening in financial conditions that we have seen in recent months should continue to temper growth and help bring demand into better balance with supply,” he said.
• Policy makers’ latest forecasts, released last week, show the level of rates roughly doubling in the second half of the year to a target range of 3.25% to 3.5%. They saw rates peaking next year at 3.8%.
• Officials have also begun shrinking their massive balance sheet. The combined impact of higher borrowing costs and so-called quantitative tightening is expected to come at some cost to jobs.
• Unemployment was near a 50-year low of 3.6% last month and Fed officials forecast it rising to 4.1% by the end of 2024, when they see rates peaking at 3.8%. Inflation was projected to decline toward their 2% goal by then from current readings of more than three times that level, according to the gauge that the Fed targets.

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were -$6.4 billion and year to date flows stand at -$40.6 billion.  New issuance for the week was $2.7 billion and year to date issuance is at $68.0 billion.

(Bloomberg)  High Yield Market Highlights

• U.S. junk bonds are headed toward the biggest weekly loss in more than two years as yields jump to a 26-month high of 8.56% amid fears that the 75 basis points hike in interest rates by the Federal Reserve, the biggest since 1994, could trigger a recession.
• High-frequency credit card data shows that consumer spending growth has started to fade, suggesting more weakness in risk assets, Brad Rogoff of Barclays wrote on Friday.
• With the Federal Reserve focused on inflation and willing to take collateral risk, downside risk worsens, Barclays wrote.
• However, high yield will trade in the +450 to +475bps range, despite periods of overshooting, Barclays’ analysts wrote.
• The spreads breached the +500 mark to close at +508bps, the widest since November 2020 amid a broader risk-off move.
• The losses spanned across high-yield ratings amid growing concern that a recession could fuel a rapid increase in credit risk.
• CCCs, the riskiest of junk bonds, are also expected to see the most weekly loss since April 2020, with week-to-date losses at 3.01%.
• CCC yields rose to 12.88%, the highest since May 2020.
• The broader junk bond index is on track to post losses for the third straight week, with week-to-date losses at 3.09%, the most in a week since March 2020.
• The steady risk aversion was becoming evident in the primary market with several new issues pricing at a steep discount.
• The primary market was fairly quiet this week. The month-to-date tally stood at $9.3b, down 63% from comparable period last year.
• Junk bonds will wait and watch as US equity futures rebound cautiously along with stocks in Europe after a rout triggered by fears of an economic downturn as major central banks close the liquidity taps.

(Bloomberg)  Powell Sets Path to Restrain Economy and Stop Runaway Inflation

• Federal Reserve Chair Jerome Powell took a step toward assuming the mantle of inflation slayer Paul Volcker, all but acknowledging that reining in run-away price pressures may result in a recession.
• Declaring that it’s essential to bring inflation down, Powell engineered the central bank’s biggest interest-rate increase since 1994 on Wednesday and held out the distinct possibility of another jumbo three-quarter percentage point increase in July.
• He openly endorsed for the first time raising rates well into restrictive territory with the aim of cooling off the labor market and pushing joblessness up — a strategy that in the past has often resulted in an economic downturn.
• “This is a Volcker-esque Fed,” said Diane Swonk, chief economist at Grant Thornton LLP. “That means the Fed is willing to take a rise in unemployment and a recession to avert a repeat of mistakes of the 1970s. Supply shocks won’t correct themselves, so the Fed must reduce demand to meet a supply constrained world.”
• The shift in stance carries perils not only for the economy, but for financial markets and President Joe Biden. Stocks have tumbled in recent months as the Fed has tightened credit to get on top of inflationary pressures that have proved more persistent and widespread than it expected.
• Biden has seen his popularity plunge as inflation has soared. A recession — and the higher unemployment that would bring — would rob the president of one of his few talking points in touting the benefits of his policies for the economy.
• An increasing number of economists are projecting a downturn next year as the Fed struggles to get on top of inflation that’s running at its highest level in four decades. Nearly 70% of academic economists polled by the Financial Times and the University of Chicago foresee a contraction in gross domestic product next year, according to survey released June 13.
• Fed policy makers’ projections released after the meeting show the economy continuing to grow this year and next, though at a subpar pace. But they also foresee unemployment rising, something that usually only happens during a recession: Joblessness is forecast to rise to 4.1% at the end of 2024 from 3.6% now, according to the median forecast.
• While maintaining that a 4.1% jobless rate would still be historically low, Powell made clear that the Fed’s No. 1 goal was not tending to the labor market but getting inflation under wraps.
• “I will begin with one overarching message,” the Fed chair said at the start of his press conference. “We’re strongly committed to bringing inflation back down, and we’re moving expeditiously to do so.”
• To that end, policy makers are projecting a steep rise in interest rates in coming months. They now see the federal funds rate they control rising to 3.4% by the end of this year and 3.8% at the end of 2023. That’s well above the 2.5% rate they reckon is neutral for the economy — neither spurring nor restricting growth — and compares with the current fund’s rate target of 1.5% to 1.75%.

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were $0.4 billion and year to date flows stand at -$36.1 billion.  New issuance for the week was $1.3 billion and year to date issuance is at $65.2 billion.

(Bloomberg)  High Yield Market Highlights

• U.S. junk bonds are headed toward the biggest weekly loss in two months after declining for five straight sessions, the longest losing streak in almost two months, as the Fed-fueled rally faded amid concerns that hawkish monetary action may precipitate an economic recession.
• Inflows into junk-bond funds have moderated, signaling investors are turning more cautious with the rally waning steadily amid fears of an imminent recession.
• Weekly losses spanned across all high yield ratings. BBs are also on track to post the biggest weekly loss in two months. The loss follows a decline in eight consecutive sessions, the longest losing streak since February.
• BBs are the worst performers week-to-date with losses of 1.46%.
• CCC yields rose to 11.62%. The index is poised to the best performing asset in the high yield market, with modest losses of 0.83% week-to-date.

(Bloomberg)  Yellen Warns Inflation to Stay High, Recants Again on Transitory

• Treasury Secretary Janet Yellen told US lawmakers peppering her Tuesday with questions about the surge in the cost of living that inflation is likely to stay high and that she ought not to have termed big price increases as “transitory” last year.
• Yellen, in a Senate Finance Committee hearing, continued to defend President Joe Biden’s $1.9 trillion American Rescue Plan, which Republicans have blamed for helping drive inflation to a four-decade high.
• “Senator, we’re seeing high inflation in almost all developed countries around the world, and they have very different fiscal policies,” Yellen said in response to Montana Republican Steve Daines. “It can’t be the case that the bulk of the inflation we’re experiencing reflects the impact of the ARP.”
• She acknowledged once again that both she and Federal Reserve Chair Jerome Powell erred in 2021 by forecasting that high inflation wouldn’t persist.
• “Both of us probably could have used a better term than ‘transitory,’” she said.
• “There’s no question that we have huge inflation pressures, that inflation is really our top economic problem at this point and that it’s critical we address it,” she added. “I do expect inflation to remain high although I very much hope that it will be coming down.”
• Lawmakers from both sides of the aisle highlighted their own concerns with inflation, ahead of midterm congressional elections in November where Democrats will be challenged to retain their control.
• Yellen, along with Democratic senators, highlighted proposals to help address living costs through measures including lowering prescription drug costs. Republicans attacked Yellen for wanting yet more spending even after the ARP had fueled price gains.
• The Treasury chief repeated her view that unexpected shocks, including Russia’s invasion of Ukraine, were not predictable and contributed significantly to the inflation Americans continue to experience.
• The hearing was on Biden’s 2023 budget proposal. Yellen told lawmakers that the plan would complement the Fed’s efforts to rein in inflation by enacting programs that would help contain costs for Americans on energy, health care and pharmaceuticals. Deficit reduction would also help, she said.

(Bloomberg)  US Inflation Quickens to 40-Year High, Pressuring Fed and Biden

• U.S. inflation accelerated to a fresh 40-year high in May, a sign that price pressures are becoming entrenched in the economy. That will likely push the Federal Reserve to extend an aggressive series of interest-rate hikes and adds to political problems for the White House and Democrats.
• The consumer price index increased 8.6% from a year earlier in a broad-based advance, Labor Department data showed Friday. The widely followed inflation gauge rose 1% from a month earlier, topping all estimates. Shelter, food and gas were the largest contributors.
• The so-called core CPI, which strips out the more volatile food and energy components, rose 0.6% from the prior month and 6% from a year ago, also above forecasts.
• The figures dash any hope that inflation had already peaked and was starting to ebb. Record gasoline prices, paired with unrelenting food and shelter costs, are adding strain to Americans’ cost of living, suggesting the Fed will have to pump the brakes on the economy even harder. That raises the risk of a recession.
• “There’s little respite from four-decade high inflation until energy and food costs simmer down and excess demand pressures abate in response to tighter monetary policy,” Sal Guatieri, senior economist at BMO Capital Markets, said in a note.
• In May, prices for necessities continued to rise at double-digit paces. Energy prices climbed 34.6% from a year earlier, the most since 2005, including a nearly 49% jump in gasoline costs. Gas prices so far in June have climbed to new highs, signaling more upward pressure in coming CPI reports and therefore keeping the Fed in the hot seat.
• Grocery prices rose 11.9% annually, the most since 1979, while electricity increased 12%, the most since August 2006. Rent of primary of residence climbed 5.2% from a year earlier, the most since 1987.
• “Tighter monetary policy will not help much with surging global commodity prices or structural changes in the way people spend and live in the post-pandemic economy,” Wells Fargo & Co. economists Sarah House and Michael Pugliese said in a note.
• That likely spells further trouble for President Joe Biden, whose approval ratings have sunk to new lows ahead of midterm elections later this year. While the job market remains a bright spot, decades-high inflation is crippling confidence among the American people and largely outpacing wage gains.

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were $4.6 billion and year to date flows stand at -$36.6 billion.  New issuance for the week was $6.0 billion and year to date issuance is at $63.9 billion.

(Bloomberg)  High Yield Market Highlights 

• The U.S. junk bond rally is steadily fading as it is heads toward a modest weekly gain of 0.04%, a big drop from the biggest weekly jump in more than two years in the previous week with returns of more than 3%. The junk bond primary market saw a flurry of new issuance in recent days from a stream of borrowers, the busiest week since mid-January.
• High yield issuers “testing market access in the coming weeks should provide better visibility on clearing levels and potentially induce further repricing in secondary spreads,” Morgan Stanley analysts led by Srikanth Sankaran wrote on Thursday.
• The recent rally is more a “reflection of credit markets still trying to calibrate growth fears and tighter liquidity,” Morgan Stanley wrote.
• The borrowers rushed to take quick advantage of the rally unleashed last week after the release of the Fed minutes signaled that the central bank may slow its monetary tightening after the expected half-percentage-point rate increases at each of the next two meetings.
• After a big surge of issuance on Wednesday pricing more than $4b to make it the busiest in five weeks, there was a marked slowdown after that. Thursday was quiet with just one deal pricing for $500m and there is nothing scheduled for pricing today.
• While the primary market was revived after a quiet and slowest May since 2002, the market was led by low risk BB rated bonds as the borrowers were testing access and risk appetite of the market.
• The spreads have tightened too fast, Barclays wrote on Friday. The credit cycle is aging quickly, and the macro picture remains gloomy in both the US and the rest of the world, Brad Rogoff, head of fixed income research at Barclays, wrote in note.
• “We expect volatility to remain elevated as the Fed tries to find the right balance,” Barclays emphasized.
• The sharp surge and sudden drop in yields and prices will continue until clarity emerges from the Federal Reserve on the right balance.
• Junk bonds may stall as US equity futures drop after a report that Tesla Inc. Chief Executive Officer Elon Musk said the electric carmaker needs to cut staff amid a gloomy economic outlook. Meanwhile, oil is headed for a sixth weekly advance after a keenly anticipated OPEC+ meeting delivered only a modest increase in output.

(Bloomberg)  Fed Starts Experiment of Letting $8.9 Trillion Portfolio Shrink

• The Federal Reserve is about to start shrinking its $8.9 trillion balance sheet, deploying a second tool along side higher interest rates to curb inflation, though officials don’t know just how effective it will be.
• After doubling in size through asset purchases in the first two years of the pandemic, the balance sheet will be reduced at a pace that’s almost twice as fast as after the last financial crisis. While the process officially commences on Wednesday, the first US Treasury securities won’t run off until $15 billion mature on June 15.
• The Fed is capping monthly runoff at $47.5 billion — $30 billion for Treasuries and $17.5 billion for mortgage-backed securities — until September. Those thresholds will then double to a combined $95 billion. That compares to a peak of $50 billion a month when the Fed performed the exercise starting in 2017.
• Officials say the reduction will work in tandem with interest-rate increases to cool price pressures by tightening financial conditions. But it’s not clear how much impact the balance sheet will have. As Fed Governor Christopher Waller put it in a speech on Monday, estimates “using a variety of models and assumptions” are “highly uncertain.”
• The Fed deployed massive asset purchases during the 2008 financial crisis for the first time since World War II, expanding the balance sheet to about $4.5 trillion by the time it stopped buying at the end of 2014. It then waited three years before allowing it to begin shrinking at the end of 2017, reducing it to about $3.8 trillion by September 2019.
• Uncertainty over the course of the balance sheet was said by commentators to have contributed to the market turmoil that ultimately helped bring an end to the Fed’s last rate-hike campaign, which concluded in December 2018. Now, the Fed is also raising its benchmark rate at a faster pace in a bid to tighten financial conditions and tame inflation, which in recent months has reached the highest levels in four decades.
• Minutes of the Fed’s most recent policy meeting, on May 3-4, said that, “Regarding risks related to the balance-sheet reduction, several participants noted the potential for unanticipated effects on financial market conditions.” The next meeting is scheduled for June 14-15.