Author: Rich Balestra - Portfolio Manager

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were -$0.7 billion and year to date flows stand at -$3.7 billion.  New issuance for the week was $7.2 billion and year to date issuance is at $194.7 billion. 

(Bloomberg)  High Yield Market Highlights 

• April is set to become the fifth-busiest month for junk-bond issuance by the end of Friday as about $1.6 billion is slated to price. A total of $47.03 billion has been sold so far this month, trailing September 2020’s $47.065 billion for a spot in the top five, according to data compiled by Bloomberg.
• This past March was the heaviest ever with almost $60b and January was the fourth-busiest with $52b
• Three of the five most active months on record have occurred this year, contributing to the busiest quarter of all-time
• Junk bonds are set post the biggest monthly gains since December, with returns of 1.06% month-to-date. This would be the seventh consecutive month of gains and the longest winning streak in more than a year
• The riskiest high-yield bracket — CCCs — are on track to post the best monthly returns in the market with 1.2% gains month-to- date. This is the 13th straight month of gains and the longest rallying stretch since September 1992
• The broader junk bond index yield closed at 4.03% and spreads were at +293bps, just 3bps away from the 14-year low of +290bps set on April 7
• CCC yields were flat at 6.13% and spreads closed at +504bps, just 11bps off the 14-year low of +493bps
    

(Bloomberg)  Biden Musters Early Congress Momentum to Pass Tax-Spend Vision 

• President Joe Biden is likely to see some version of his $4 trillion economic plan passed in Congress by September or October if he can keep various Democratic factions from splintering the party and continue fending off Republican attempts to paint it as radical.
• Biden holds some advantages in pushing for what would be a massive expansion of the government, not the least of which is that the trillions of dollars spent to counter the economic dislocation of the Covid-19 pandemic reset expectations in Congress and among voters about fiscal policy.
• Once Biden’s plan is put into legislative text, Democrats can use Senate rules to bypass Republican opposition to most of it.
• But the president’s proposals won’t emerge from Congress unscathed, and it’s not yet clear which parts will be left on the cutting room floor or what might be added. There is also the question of whether Congress, with Democrats holding only the narrowest margin of control, sticks to Biden’s two-part vision of a roughly $2.3 trillion tranche focused on infrastructure and manufacturing and $1.8 trillion package focused on education and child care.
• The first test will be infrastructure. There is a strong possibility that Congress is able to come together on a smaller, bipartisan measure focused on roads, bridges, transit, water and broadband internet in the coming weeks.
• Biden ally Senator Chris Coons of Delaware said trying to strike a deal with Republicans on some portion of Biden’s plan is necessary because there are Democrats who will balk at trying to pass the rest of it on a partisan basis as was done with the $1.9 trillion Covid-relief bill earlier this year.
• Negotiating with Republicans is crucial “both for the benefits of bipartisanship on its own and for internal and political reasons,” Coons said.
• Negotiations won’t end even if Democrats go it alone on the bigger part of Biden’s plan.
• The Senate Democratic caucus spans the gamut from self-described democratic socialist Bernie Sanders, who is already pushing to add an expansion of Medicare to the mix, to Manchin, who is already calling the level of spending “uncomfortable.” Manchin has expressed concern that the tax increases on corporations Biden proposes to pay for his plans could hurt the economy.
• In the House, Democrats currently hold only a six vote majority. It will be a challenge to manage the competing interests of the Congressional Progressive Caucus, which is pushing for trillions more in spending to be added to the Biden plans, and moderates who worry about keeping their seats in the 2022 midterms where the GOP will have a redistricting advantage.
• In addition, there is a faction of lawmakers from high-tax states threatening to withhold support on any tax-related legislation unless it also repeals the $10,000 cap on deductions for state and local taxes.
• The moderate Blue Dog Coalition warned in a Wednesday statement that Democrats must be realistic in crafting the bills and that “messaging bills that cannot pass both chambers do not put people back to work, do not help open small businesses, and do not lower the costs of health care.”
• McConnell on Thursday said Biden was dividing the country and warned that changes made without GOP support in Congress could easily be reversed whenever Republicans regain control of Washington.

(Bloomberg)  Fed Strengthens View of Economy While Keeping Rates Near Zero 

• Federal Reserve officials strengthened their assessment of the economy on Wednesday and signaled that risks have diminished while leaving their policy interest rate near zero and maintaining a $120 billion monthly pace of asset purchases.
• “Amid progress on vaccinations and strong policy support, indicators of economic activity and employment have strengthened,” the Federal Open Market Committee said in a statement following the conclusion of its two-day policy meeting. “The sectors most adversely affected by the pandemic remain weak but have shown improvement. Inflation has risen, largely reflecting transitory factors.”
• The Fed said that “risks to the economic outlook remain,” softening previous language that referred to the pandemic posing “considerable risks.”
• Powell and his colleagues met amid growing optimism for the U.S. recovery, helped by widening vaccinations and aggressive monetary and fiscal support.
• At the same time, a rise in coronavirus cases in some regions around the world casts a shadow over global growth prospects, giving policy makers reason to remain patient on withdrawing support. Fed officials have also been largely dismissive of inflation risks for the time being, saying a jump in consumer prices last month was distorted by a pandemic-related decline in prices in March 2020.
• U.S. central bankers repeated they would not change the pace of bond buying until “substantial further progress” is made on their employment and inflation goals.
• Forecasters surveyed by Bloomberg expect the U.S. economy this year to expand at the fastest pace in more than three decades, with the Fed expected to announce in late 2021 that it will start slowing the pace of asset purchases.

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were -$0.8 billion and year to date flows stand at -$5.6 billion.  New issuance for the week was $15.4 billion and year to date issuance is at $129.7 billion.

 (Bloomberg)  High Yield Market Highlights 

• Year-to-date U.S. junk-bond returns turned negative for the first time since January, and are set to post a weekly loss after Thursday’s 0.29% decline. It was the biggest one-day drop in three weeks, according to data compiled by Bloomberg. This would mark the fifth consecutive week of losses and the longest stretch of weekly declines since August 2013.
• Yields jumped 13bps to close at a 15-week high of 4.57%, the most in three weeks. Spreads were steady, widening by 5bps to +337 as the 5Y UST rose 6bps to 0.86% on Thursday
• While yields rose, spreads remained intact and “avoided volatility” as the demand backdrop remained supportive despite concerns about retail outflows, Barclays strategist Brad Rogoff wrote on Friday
• “Strong economic growth should allow higher-beta credit to hold its recent outperformance”
• As returns turned negative and investors showed some weariness, there was no serious risk aversion as retailer Neiman Marcus is set to price a $1b offering of five-year notes, rated Caa2/CCC+, as soon as today
• Proceeds of the deal will be used to repay debt it incurred to exit bankruptcy in September
• Junk bonds have come under pressure after pricing more than $40b this month, just about $2b short of making this the busiest March on record. The most active March came in 2017, with $42.165b sold. This year’s first quarter has seen almost $130b of supply, the second-busiest quarter ever
• BB yields rose to a four-month high of 3.72% while spreads held firm widening just 3bps when 5Y UST rose 6bps
• CCCs, the riskiest tier of junk bonds, also posted a loss of 0.2% on Thursday. Yields rose 19bps to 6.76%
• Stock futures rebounded after dropping overnight as the Nasdaq climbed this morning. Oil tried to recover this morning but was heading for the biggest weekly loss since October

(Bloomberg)  Powell Faces Tough Campaign to Convince Traders of Fed’s Resolve

• The Federal Reserve succeeded in pushing back against market expectations for a rate hike in the next two years, but only partially.
• The central bank envisages keeping rates near zero to the end of 2023 despite a significantly brighter assessment of growth and higher inflation over the near term. After the release, traders trimmed some of the more-aggressive positioning they’ve been building for a “lift-off” by earlier in 2023.
• But a 25 basis-point hike by the first quarter that year is still reflected in Eurodollar futures, which are priced off Libor and are a decent proxy for future borrowing costs. So traders haven’t exactly brought their views on the timing that much closer to the central bank’s guidance.
• “The market will need to be reminded again and again of the Fed’s commitment” to support the recovery, said Anne Mathias, global rates and currencies strategist at Vanguard Group Inc. “If higher yields don’t slow the economy down, don’t upset the stock market, don’t upset risk-taking, then the Fed doesn’t need to push back hard against them,” she said in an interview.
• Current rates-market pricing reflects a lingering conviction that the pace of the recovery will spur the Fed to action, earlier than it anticipates, though Chair Jerome Powell reiterated Wednesday that the Fed needs to see “substantial further progress” on its employment and inflation goals before thinking about a hike.
• That statement helped short-end rates fall. Seven-year yields remained elevated, however, which suggests positioning for higher interest rates may be building further out the curve. A later rate hike could force the central bank to move faster to tame inflation.
• Market gauges of inflation expectations imply some faith in the central bank’s ability to keep it under control. The five-year breakeven rate, which is derived from the difference between yields on Treasuries and their inflation-protected counterparts, is around the highest since 2008, at 2.63%. That compares with a lower 10-year breakeven rate showing price pressures returning to the Fed’s target over the decade.
• That chimes with the Fed’s guidance, in Mathias’s view.
• “We’re going to see some interim inflation pressure from pent-up spending,” she said. “Net-net, though, the overall secular forces that have kept inflation at bay have not changed.”

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were -$0.1 billion and year to date flows stand at $1.8 billion.  New issuance for the week was $3.0 billion and year to date issuance is at $75.4 billion.

  (Bloomberg)  High Yield Market Highlights

• The U.S. junk bond market is wrapping up the slowest week for issuance this year with just $3 billion of debt sold so far, and no deals as yet slated to price Friday. Average yields, meanwhile, have bounced off all-time lows reached earlier this week.
• As new issuance slowed, investors piled billions of dollars into offerings that did come to market even as high-yield funds saw an outflow this week
• February issuance volume is running at almost $25b, about $5b away from the total amount sold in the same month last year, according to data compiled by Bloomberg
• CCCs, the riskiest junk bonds, have accounted for 25% of bond sales this month. Issuers have ranged from energy firms to covid-hit borrowers from the travel, leisure and entertainment sectors
• Average junk bond yields rose 3bps to 3.99% Thursday, but are still just 10bps off the record low set earlier this week
• The broader index posted a loss of 0.05% on Thursday, the second consecutive session of negative returns, and the biggest one-day loss in three weeks

(Bloomberg)  BB Junk-Bond Yields Drop Below 3% for the First Time Ever

• The average yield on U.S. junk bonds in the Double-B tier dropped below 3% for the first time ever on Tuesday as investors continue to pile into an asset class historically known for its high yields.
• The average yield on BB debt, the safest of junk bonds, fell 7bps to a record low of 2.98%, according to Bloomberg Barclays index data
• The measure for the broader U.S. Corporate High-Yield index dipped to 3.89%, down 7bps in the biggest one-day decline in about seven weeks, the data show
• CCC yields also fell to a new low of 6.11% amid calls from some credit strategists to selectively buy the riskiest of junk bonds to boost returns
• There is “no reason to be bearish” and cash levels are down to just 3.5%, an eight-year low, Bank of America wrote in the report based on a survey of global fund managers
• More borrowers are expected to sell new debt to take advantage of cheap borrowing costs and strong demand from investors
• CCC debt has gained 1.19% in February, and 2.69% since the start of the year, beating all other rating buckets in the junk bond market
• The broad junk index has gained 1.02% month-to-date and 1.36% year-to-date
• The rally may continue with oil closing at a 13-month high near $60as a winter storm halts a third of U.S. crude output

(Wall Street Journal)  Saudis Plan to Reverse Oil Cuts as Prices Rise

• Saudi Arabia plans to increase its oil output in the coming months, reversing a recent big production cut, advisers to the kingdom said, a sign of growing confidence over an oil-price recovery.
• The world’s largest oil exporter surprised oil markets last month when it said it would unilaterally slash 1 million barrels a day of crude production in February and March in an effort to raise prices.
• But the kingdom plans to make public a reversal of those cuts when a coalition of oil producers meet next month, the advisers said, in light of the recent recovery in prices. The output rise won’t kick in until April, given the Saudis already have committed to stick to cuts through March.
• The advisers cautioned the plans still could be reversed if circumstances change, and the Saudis’ intention hasn’t yet been communicated to the Organization of the Petroleum Exporting Countries, the people and OPEC delegates said.
• “We are in a much better place than we were a year ago, but I must warn, once again, against complacency,” Prince Abdulaziz bin Salman, the Saudi energy minister, said at a conference on Wednesday. “The uncertainty is very high, and we have to be extremely cautious.”
• “A Saudi increase in production. . .makes perfect sense given the tightness that is starting to emerge in the market,” said Ole Hansen, head of commodity strategy at London-based Saxo Bank. “The market will probably take it quite well.”
• The planned Saudi move to restore supplies isn’t expected to immediately spark large output increases from other big producers, analysts said, given the kingdom is acknowledged to have carried the biggest burden in reducing production.
• However, analysts do expect compliance with output curbs among producers to be increasingly loose as the recovery gains momentum.

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were -$0.9 billion and year to date flows stand at -$0.1 billion.  New issuance for the week was $15.1 billion and year to date issuance is at $72.3 billion.  

(Bloomberg)  High Yield Market Highlights 

• In terms of issuance, this has been the second busiest week of the year, according to data compiled by Bloomberg. With yields at record lows, more borrowers are expected to hit the market after the long weekend.
• High-yield funds returned to outflows for the week, following an inflow of $1.34b last week
• Investors are still buying new issues in droves, and the risky debt is headed for its second straight week of positive returns
• The Bloomberg Barclays U.S. Corporate High-Yield index yield held steady at a record low of 3.95% on Thursday
• A strong technical backdrop and improving fundamentals could drive spreads even tighter in the short term, Barclays Plc credit analysts led by Brad Rogoff wrote in a note Friday
• A roster of formerly distressed companies have sold notes this week and CCCs, the riskiest junk bonds, accounted for about 19% of total bond sales, the data compiled by Bloomberg show
• CCC yields rose to 6.19%, just 3bps off an all-time low of 6.16% 

(Bloomberg)  U.S. Junk-Bond Yields Drop Below 4% for the First Time Ever 

• The average yield on U.S. junk bonds dropped below 4% for the first time ever as investors seeking a haven from ultra-low interest rates keep piling into an asset class historically known for its high yields.
• The measure for the Bloomberg Barclays U.S. Corporate High-Yield index dipped to 3.96% on Monday evening, making it six straight sessions of declines.
• Yield-hungry investors have been gobbling up junk bonds as an alternative to the meager income offered in less-risky bond markets. Demand for the debt has outweighed supply by so much that some money managers are even calling companies to press them to borrow instead of waiting for deals to come their way. A majority of new issues, even those rated in the riskiest CCC tier of junk, have been hugely oversubscribed.
• The lower yields should encourage more speculative-grade companies to tap the market after raising more than $7 billion last week. January was a record month for sales with $52 billion priced.
• Buyers have been snapping up CCC graded issues as yields for that slice of high yield also decline. They dropped to 6.21% on Monday, also a record low, and have outperformed the rest of the market for three consecutive months, according to data compiled by Bloomberg.
• Issuance conditions have been so conducive that some of the riskiest types of transactions come to market, such as bonds that are used to fund dividends to a company’s owners and so-called pay-in-kind bonds that allow a borrower to pay interest with more debt.

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were $2.5 billion and year to date flows stand at $0.8 billion.  New issuance for the week was $13.3 billion and year to date issuance is at $57.2 billion.

(Bloomberg)  High Yield Market Highlights

• U.S. junk bond yields hit a new all-time low of 4.09%, while funds that buy the risky debt saw their first weekly influx of cash this year. Great Western Petroleum could be the latest energy company to benefit from the wide-open market, looking to clear out near-term maturities and land a higher credit grade with a debt sale that’s due Friday.
• The high-yield market is headed for the biggest gains in a little more than two months, according to data compiled by Bloomberg, and yields may fall further with credit risk lower, and stock futures advancing after the U.S. Senate voted to adopt a budget blueprint for a $1.9 trillion stimulus package
• The market’s also getting a boost from rising oil prices, which climbed close to $60 a barrel
• Investors poured money into high-yield funds for the week. It follows four straight weeks of outflows
• Investors are snapping up debt in the riskiest CCC tier that’s notched up gains of more than 2% already this year. Yields on the debt have plunged to 6.48%, just 6bps off the record low of 6.42%
• “Stressed credits have historically been a good place to look for strong returns,” Barclays Plc credit analysts led by Brad Rogoff wrote in a note Friday
• In the primary market, more than a third of sales this week have been deals with ratings in the CCC bucket.
• Average junk-bonds have gained 0.56% this week, the best in about two months
• BB yields closed at a new all-time low of 3.16%
• CCCs posted gains of 0.2% on Thursday, the best asset in the high yield market. It is set to post gains of 0.67% for the week

(Bloomberg)  Credit Upgrade Cycle Is in Full Swing Amid Signs of Recovery

• As the U.S. economy shows more signs of recovering from the worst of its pandemic doldrums, the credit upgrade cycle is in full force.
• Junk companies are seeing their ratings increased in droves, with upgrades so far this quarter reaching the highest level relative to downgrades since the end of 2013, according to data for the U.S. compiled by Bloomberg. That’s a big about-face from last year, when the pandemic weighed on companies’ profits and triggered a near unprecedented rate of downgrades.
• With governments in the U.S. and Europe providing extensive support to the economy, low interest rates boosting the money supply, and signs of an improving economy, there’s a wave of upgrades happening now, according to Christina Padgett, head of leveraged finance research at Moody’s.
• Companies are refinancing shorter-term loans they got at the height of the pandemic and turning them into longer-term obligations, which is also a positive sign, she said. Boeing Co., which Moody’s rates at Baa2 or the second-lowest investment-grade level, sold $9.825 billion of bonds Tuesday, refinancing some of the $13.8 billion loan it drew down at the beginning of the Covid-19 outbreak.
• “We do see light at the end of the tunnel,” said Padgett in an interview. “The economy both in the U.S. and Europe will grow materially this year.”
• U.S. initial jobless claims fell last week to the lowest level since the end of November, a signal that job cuts are starting to slow as Covid-19 infections ebb, according to a report on Thursday.
• Even with economic improvement, junk-rated companies still face trouble, including the higher debt loads many of them now bear, said Moody’s Padgett. Shedding those obligations could be difficult.
• “If you were very levered going into the downturn, it is going to be much harder to exit with a sustainable capital structure,” she said.
• Ratings firms may have been too quick to downgrade in the first place, Bank of America Corp. credit strategists led by Hans Mikkelsen wrote on Wednesday.
• “Rating agencies overreacted to the Covid-crisis when downgrading investment-grade companies during the first part of 2020, and to compensate there will be an upgrade cycle this year,” Mikkelsen wrote.
• The number of companies facing near-term potential downgrades, among issuers rated AAA to B-, dropped for the fifth consecutive month to 1,178 on Dec. 25, from a historic high of 1,365 in July, S&P Global Ratings said in a report Tuesday. The downgrade risk among non-financial companies, however, remains elevated this year, with airlines as a vulnerable industry.

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were -$0.3 billion and year to date flows stand at -$0.3 billion.  New issuance for the week was $16.7 billion and year to date issuance is at $32.9 billion.

 (Bloomberg)  High Yield Market Highlights

• Yields on CCC debt, the riskiest of junk bonds, have hit an all-time low of 6.42% as investors seek bigger returns by moving down the credit curve. US LBM Holdings is the latest borrower to reap rewards from that chase, receiving more than $2.5 billion of demand for a $400 million pay-in-kind bond with ratings in the CCC tier to fund a dividend to Bain Capital.
• The recent CCC tightening has been driven by bond-level performance rather than shifts in the index constituents, Barclays Plc credit strategists led by Brad Rogoff wrote in a note Friday
• There is still room for higher-beta credits to compress, but investors should be selective given some continued Covid-related weakness.
• The CCC index has rallied for 20 straight sessions to post gains of 0.17% on Thursday, and has outperformed other parts of junk for about 11 weeks, according to data compiled by Bloomberg
• Yields on the broader junk bond index also dropped to a record low of 4.10%, though the rally may stall with credit risk higher, stock futures falling and oil prices lower amid renewed fears that the spread of coronavirus may force more lockdowns
• S. high-yield funds reported an outflow for week, the third straight week of exits, but new issues are still being inundated with demand
• The market stands about $2.5b away from making this month the busiest January ever as companies continue to churn out debt offerings to meet voracious demand

(CNBC)  IEA cuts 2021 oil demand outlook

• The IEA said it now expects world oil demand to recover by 5.5 million barrels per day to 96.6 million this year. That reflects a downward revision of 0.3 million barrels from last month’s assessment.
• The report comes as countries continue to implement strict public health measures in an attempt to curb virus spread, with lockdowns imposed in Europe and parts of China.
• Oil prices have rallied in recent weeks, supported by optimism over Covid vaccine rollouts and a surprise oil production cut from OPEC kingpin Saudi Arabia.
• “The global vaccine roll-out is putting fundamentals on a stronger trajectory for the year, with both supply and demand shifting back into growth mode following 2020′s unprecedented collapse,” the IEA said in its closely-watched report.
• “But it will take more time for oil demand to recover fully as renewed lockdowns in a number of countries weigh on fuel sales,” it added.

(New York Times)  Biden Cancels Keystone XL Pipeline and Rejoins Paris Climate Agreement

• President Biden on Wednesday recommitted the United States to the Paris climate agreement, the international accord designed to avert catastrophic global warming, and ordered federal agencies to start reviewing and reinstating more than 100 environmental regulations that were weakened or rolled back by former President Trump.
• Biden has elevated tackling the climate crisis among his highest priorities.
• “We’re going to combat climate change in a way we have not before,” Mr. Biden said in the Oval Office on Wednesday evening, just before signing the executive orders. Even so, he cautioned: “They are just executive actions. They are important but we’re going to need legislation for a lot of the things we’re going to do.”
• Also on Wednesday, Mr. Biden rescinded the construction permit for the Keystone XL oil pipeline, which would have transported carbon-heavy oil from the Canadian oil sands to the Gulf Coast. Earlier in the day, TC Energy, a Canadian company, said that it was suspending work on the line

(CAM Note)  As we go to print, the WTI crude oil price is down 2.5%.

(Bloomberg)  High Yield Market Highlights 

• Urban One Inc. is slated to sell an $825 million seven-year note Friday, which would push issuance this week to about $8 billion. The junk bond primary has been dominated by energy companies, and more deals could emerge with oil prices rallying.
• Energy companies have accounted for more than 60% of the issuance volume this week, fueled by rising oil prices and a drop in energy index yields to below 6% for the first since January 2018, according to data compiled by Bloomberg
• Brent crude topped $55 a barrel, while West Texas Intermediate rose above $51, its highest since February 2020
• The energy index returned 0.39% Thursday, and has gained for 11 straight sessions
• Broader junk bond yields closed at 4.17%, and spreads at +350bps. Spreads were at a new 10-month tights, and yields were just 1bp above the all-time low yield of 4.16%
• Barclays Plc credit strategist Brad Rogoff expects the risk rally to continue as “the probability of increased fiscal support will continue to outweigh any concerns on potentially higher corporate taxes”

(Wall Street Journal)  Saudis to Cut Output In Bid to Lift Oil Price 

• Saudi Arabia said it would unilaterally cut one million barrels a day of crude production starting next month, a surprise move signaling the kingdom’s worry that a resurgent coronavirus is threatening global economic recovery.
• The announcement Tuesday came after Riyadh agreed earlier in the day with other big producers to keep the group’s collective output flat, after a now-monthly assessment by the Saudi-led OPEC cartel and a group of big producers led by Russia. In that deal, the two groups, collectively called OPEC-plus, agreed to a complex deal to hold production broadly unchanged from current levels.
• Oil prices, which had already risen sharply on news of the OPEC-plus deal, soared on the Saudi announcement. In early-afternoon trading Tuesday, West Texas Intermediate futures, the U.S. benchmark, were up 5.2% a barrel, passing through the $50 mark for the first time since last February.
• Saudi Energy Minister Abdulaziz bin Salman said the unilateral move was made “with the purpose of supporting our economy, the economies of our friends and colleagues, the OPEC-plus countries, for the betterment of the industry.”

(Bloomberg)  Massive Package of Virus Relief, Federal Funding Passes Congress 

• Congress passed the second-biggest economic rescue package in U.S. history as part of a massive year-end spending bill, concluding months of discord between Democrats and Republicans over how to address the pandemic that continues to surge across the country.
• In addition to funding government operations for the rest of the fiscal year, the legislation will provide aid for small businesses, supplemental unemployment benefits and $600 stimulus payments to most Americans and their children starting as soon as next week. It also includes money for schools, airlines and for distribution of vaccines.
• The Senate followed the House late Monday in passing by overwhelming margins the $2.3 trillion bill, just hours after lawmakers got their first look at the 5,593 pages of text. The White House has said President Donald Trump will sign it.
• Economists say the aid should be enough to avert a double-dip recession next year, though risks remain and both parties expect to be wrangling over addition relief measures after President-elect Joe Biden takes office on Jan. 20. Many of the aid provisions, such as the extended jobless benefits, will expire in the first quarter of next year.
• While the bill is smaller than many economists had anticipated months ago, it could be enough to ward off another contraction in gross domestic product.
• “This latest fiscal rescue package will add approximately 1.5 percentage points to annualized real GDP growth in the first quarter of 2021 and close to 2.5 percentage points to calendar-year 2021 growth,” said Mark Zandi, of Moody’s Analytics. “If lawmakers had not come through, the economy probably would have suffered a double-dip recession in early 2021.”

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were -$0.9 billion and year to date flows stand at $48.7 billion.  New issuance for the week was $12.8 billion and year to date issuance is at $425.8 billion. 

(Bloomberg)  High Yield Market Highlights 

• The U.S. junk bond rally is set to extend the CCC-tier’s reign as the best-performing high-yield debt to seven consecutive weeks, with the index poised to end the week with gains of 0.5%. That beats higher-quality BBs and single-Bs.
• The CCC index has rallied for 24 straight sessions and posted gains of 0.2% on Thursday, the longest winning streak since 2011
• The high-yield primary has cleared its calendar ahead of the holidays, pricing $2.5b yesterday to take the month’s volume to almost $30b, the busiest December since at least 2006
• While the primary takes a break, one of the market’s top-five dealers expects more borrowers to return in the new year as the “extremely attractive” conditions should continue at least into the first quarter
• Average January issuance over the last six years has been in the range of $20b, according to data compiled by Bloomberg
• CCCs have accounted for 20% of the overall issuance volume this week
• Energy dominated the primary this week, accounting for almost one-third of the supply
• Junk bond yields rose 1bp to close at 4.41%, just 7bps off the all-time low of 4.34%. Spreads closed at +378bps, down from +379
• The index gained for the fourth straight session, with returns of 0.09%
• CCC yields closed at a new 6Y low of 7.37%, down 5bps, while spreads closed at fresh 2Y low of +677bpsm also down 5bps
• The high yield market may pause as the week winds down and stock futures move sideways while oil gains to a new 10-month high

(Wall Street Journal)  Energy Agency Cuts Global Oil-Demand Forecast 

• It will be several months before coronavirus vaccinations start to boost global oil demand, with the recovery in some of the world’s wealthy countries “going backwards” this quarter, the International Energy Agency said Tuesday.
• In its monthly oil-market report, the IEA cut its forecast recovery in demand for 2021 by 170,000 barrels a day to 5.7 million barrels a day.
• That included a reduction of 400,000 barrels a day to its forecast demand for the second quarter when analysts had expected the expansion of vaccination programs around the world to begin lifting economic activity.
• The agency also lowered its demand forecast for the final quarter of 2020.
• Demand has somewhat recovered in the second half from its 16% drop in the second quarter, but that resurgence “is almost entirely due to China’s fast rebound from lockdown,” the IEA said. But the demand outlook in the wealthy countries that make up the Organization for Economic Cooperation and Development is bleak, according to the IEA.
• With another wave of infections prompting a return to lockdown measures in Europe, demand there in the final three months of the year is expected to be even weaker than it was in the third quarter, the agency said.
• Expected pressure on the airline industry in 2021 was a major driver behind the IEA’s downgrades.
• Weaker demand for jet fuel and kerosene is projected to next year account for 80% of the shortfall of 3.1 million barrels a day in overall demand compared with 2019, meaning the world in 2021 would recover only two-thirds of the demand lost this year.

(Bloomberg)  Fed to Maintain Bond Buys Until ‘Substantial’ Economy Gains Seen

• The Federal Reserve strengthened its commitment to support the U.S. economy, promising to maintain its massive asset purchase program until it sees “substantial further progress” in employment and inflation.
• At their final meeting of a tumultuous year, policy makers led by Chair Jerome Powell on Wednesday voted to maintain monthly bond purchases of at least $120 billion and scrapped their previous pledge to keep buying “over coming months.”
• The Fed meeting came as lawmakers on Capitol Hill tried to wrap up an agreement on new stimulus after months of deadlock, with both fiscal and monetary policy poised to help continue cushioning an increasingly shaky economy during the wait for widespread vaccine distribution.
• The Federal Open Market Committee said “economic activity and employment have continued to recover but remain well below their levels at the beginning of the year.” Its quarterly projections for the economy showed some improvement compared with September.
• The committee unanimously kept the federal funds target rate in a range of zero to 0.25%, where it’s been since March, and a majority of Fed officials continued to forecast that their benchmark lending rate would be held near zero at least through 2023.
• The FOMC “expects it will be appropriate to maintain this target range until labor market conditions have reached levels consistent with the committee’s assessments of maximum employment and inflation has risen to 2% and is on track to moderately exceed 2% for some time,” policy makers said, repeating language from their November statement.