Author: Rich Balestra - Portfolio Manager

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were +$1.0 billion and year to date flows stand at $36.2 billion.  New issuance for the week was $5.7 billion and year to date issuance is at $230.4 billion.

(Bloomberg)  High Yield Market Highlights

• S. junk bonds yields are on track for the biggest monthly decline on record at 5.41%, according to data compiled by Bloomberg.
• Junk has returned 4.5% in July, the most for any month since April, the data show. A slower pace of issuance in July of around $25b and robust inflows have helped drive yields down
• Technicals should remain supportive, Barclays Plc strategists led by Brad Rogoff wrote in a note Friday
• Funds that invest in high-yield bonds saw inflows for the third straight week
• The calendar for Friday is likely to be light. Leviathan Bond and Western Global Airlines are marketing deals that are scheduled to price next week
• High-yield bonds with more than $93.9b outstanding are trading above upcoming call prices, making it attractive for issuers to redeem the securities in the next three months
• CCCs accounted for about a third of the week’s volume, according to data compiled by Bloomberg
• G-III Apparel group also priced a $400m deal at the tight end of talk after receiving orders of more than $900m
• Junk bond spreads closed at a five-month low of 491bps more than Treasuries. Yields fell to 5.41%, also a five-month low

(CNBC)  Fed holds rates steady, says economic growth is ‘well below’ pre-pandemic level

• The Federal Reserve held interest rates steady in a decision announced Wednesday that came along with a tepid outlook on the coronavirus-plagued economy.
• In a move widely expected, the central bank kept its benchmark overnight lending rate anchored near zero, where it has been since March 15 in the early days of the pandemic.
• Along with keeping rates low, the Federal Open Market Committee, which sets monetary policy, expressed its commitment to maintain its bond purchases and the array of lending and liquidity programs also associated with the virus response.
• “We are committed to using our full range of tools to support our economy in this challenging environment,” Fed Chairman Jerome Powell said.
• The post-meeting statement labeled the current state of growth as better than it was at the trough but still not up to par.
• “Following sharp declines, economic activity and employment have picked up somewhat in recent months but remain well below their levels at the beginning of the year,” the statement said. “Weaker demand and significantly lower oil prices are holding down consumer price inflation. Overall financial conditions have improved in recent months, in part reflecting policy measures to support the economy and the flow of credit to U.S. households and businesses.”
• Markets reacted little to the news, with stocks mostly holding earlier gains and government bond yields mixed.
• “In short, this is a holding operation, pending developments with both the virus itself and fiscal policy,” said Ian Shepherdson, chief economist at Pantheon Macroeconomics.
• Officially, the FOMC kept its rate targeted in a range between 0%-0.25%, where it last was during the Great Recession. The statement said the rate would stay there until officials are “confident that the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals.”
• “The path of the economy will depend significantly on the course of the virus,” the statement said.
• “It’s just such an important sentence, we decided it needed to be in our post-meeting statement,” Powell added during his post-meeting news conference. “It’s so fundamental.”

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were +$4.3 billion and year to date flows stand at $35.2 billion.  New issuance for the week was $4.4 billion and year to date issuance is at $224.7 billion.

(Bloomberg)  High Yield Market Highlights

• With 1.5% of returns, junk bonds are on their way to the biggest weekly gain since June 5. It also marks the fourth straight week of positive returns, the longest winning stretch since January.
• Investors have propelled the four-week rally as U.S. high-yield funds continued to report inflows. An influx of $4.3b for the week is the third consecutive period of incoming cash and the 10th biggest on record
• CCCs got a boost from the risk-on tone and are poised to post the biggest weekly gains in seven. With 1.64% returns, it’s the best asset class for the week in U.S. high yield. CCCs have outperformed BBs and single Bs which are expected to show gains of 1.52% and 1.46%, respectively
• CCCs would be outperforming BBs and single Bs for the second consecutive week
• Should the pace of the rally continue uninterrupted into next week, CCCs are set to outperform BBs and single Bs for the third straight month with 3.89% returns month- to-date
• Yields and spreads snapped a six-day rally and rose 4bps to 5.59% and +504bps, respectively, as equities dropped more than 1% and oil prices fell almost 2%
• Issuance slowed as earnings gained momentum with just three deals for $1.265b pricing on Thursday, taking the week’s volume to $4.4b and July to almost $19b
• Barclays strategist Bradley Rogoff cautions in a note Friday that the markets are now through year-end spread targets and the next five months will see “plenty of risks,” though strong technicals may help avoid a substantial selloff in the short run
• High-yield bonds with more than $81.4b outstanding are currently trading above upcoming call prices, making it attractive for issuers to redeem them in the next three months
• Junk bonds may pause ahead of the weekend as stock futures edged lower amid escalating tensions between the U.S. and China with the risk-off tone appearing to hold

(CNBC)  Senate GOP, White House reach tentative $1 trillion pact to break coronavirus aid logjam

• Senate Republicans announced Wednesday evening that they have “reached a fundamental agreement” with White House negotiators on how to move forward with a coronavirus relief bill.
• After the third meeting this week, Sens. Richard Shelby, R-Ala., chair of the Appropriations Committee; Lamar Alexander, R-Tenn., chair of the Health, Education, Labor and Pensions Committee; and Roy Blunt, R-Mo., chair of the Rules Committee, emerged from the negotiating room with Treasury Secretary Steven Mnuchin and White House chief of staff Mark Meadows saying they are “completely on the same page” and “in good shape.”
• The tentative framework comes amid tension in the party over how to respond to the coronavirus pandemic, which is forcing states to re-evaluate their plans to reopen and to address the growing numbers of cases and deaths.
• The legislation remains fluid, and Senate Majority Leader Mitch McConnell, R-Ky., has indicated that he wants to keep the price tag at $1 trillion. Republicans aren’t all on the same page, as some have denounced the cost amid a soaring national debt. But the latest talks show some signs of breaking an intraparty logjam that has kept negotiations at a dead stop for weeks.
• The new proposal will serve as a starting point for negotiations with Democrats, who have passed a $3.4 trillion bill in the House and have been pressuring the GOP to move quickly on new aid as COVID-19 cases and deaths rise in the United States.
• Mnuchin told reporters Wednesday that negotiators agreed to provide Americans with another round of direct payments, which the administration has been pushing for weeks. The details, however, have yet to be settled upon.
• Asked whether there is a consensus on an amount, Mnuchin said, “I’m not going to get into specifics right now, but there is an agreement.”
• It isn’t clear at this point, however, whether the terms of the direct payments will mirror those of the initial package in March — which Democrats want in a future aid package.
• While Republicans spent most of Wednesday floating the idea of a short-term extension of enhanced unemployment insurance benefits, the White House seemed to cool to the proposal.
• “We’re really looking at trying to make sure that we have a comprehensive bill that deals with the issues,” Meadows told NBC News. “Any short-term extensions would defy the history of Congress, which would indicate that it would just be met with another short-term extension.”
• The $600-a-week federal payment for jobless Americans is set to run dry at the end of the month, and with no extension, it could lag until Republicans come to a broader consensus.
• And there was no agreement on a payroll tax cut, a top priority for the administration but for only a handful of Senate Republicans.
• “We really are not in a position to talk any specifics,” Meadows said. “We’re going let Leader McConnell talk about that after he actually has a more thorough conversation with his senators.”

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were +$1.0 billion and year to date flows stand at $30.9 billion.  New issuance for the week was $6.7 billion and year to date issuance is at $220.3 billion.

(Bloomberg)  High Yield Market Highlights

• S. junk bonds have notched up the biggest gains in six weeks as investors pour more cash into the asset class and the pace of issuance slows.
• Junk bonds spreads have tightened 39bps in the past week to 558bps more than Treasuries, the lowest in a month. The rally was fueled by “a slew of positive surprises on the economic front,” Barclays Plc credit strategists led by Brad Rogoff wrote in a note Friday. Yields dropped 42bps in the same period
• As primary activity winds down for the week, a group of banks led by UBS Group AG is looking to refinance a short-term loan for auto-parts maker BBB Industries that they funded in April amid volatility in credit markets
• The $240m secured junk bond that matures in five years may be sold as soon as Friday. Pricing discussions are for a yield of 10.25% to 10.5% including a discount
• Norwegian Cruise Line Holdings followed in the footsteps of Carnival to revisit the junk bond market as the pandemic keeps ships at dock. It sold $750m of senior secured bonds, up from $675m earlier, with a yield of 10.25% that was reduced from earlier pricing discussions in the 10.5% area. Orders reached more than $1.9b
• High- yield bonds with more than $61.5b outstanding are trading above upcoming call prices, making it attractive for issuers to redeem the securities in the next three months
• Netflix announced its 2Q earnings and dashed all hopes of another bond offering this year saying, “we have sufficient liquidity to fund our operations for over 12 months. As a result, we don’t expect to access the debt markets for the remainder of 2020 and we believe our need for external financing is diminishing”
• Netflix has come to the junk bond market every April and October since 2016
• Junk bonds posted gains of 0.17% on Thursday, the second straight session of positive returns. They’ve gained 0.99% for the biggest weekly jump since June 5
• Spreads and yields fell to about a four-week low of +558 and 6.16%, down 5bps and and 6bps, respectively

(Bloomberg)  Update on Fed Buying

• The Federal Reserve has slowed down its purchase of corporate bonds as the functioning of markets has improved, to less than $200 million per day from around $300 million a day. It said that if market conditions continue to improve, it might slow its buying further, or perhaps even stop entirely. So far through July 8, the central bank has bought just $10.7 billion of corporate notes and related exchange-traded funds.

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were +$2.0 billion and year to date flows stand at $34.1 billion.  New issuance for the week was $5.8 billion and year to date issuance is at $213.5 billion.

(Bloomberg)  High Yield Market Highlights

• S. junk bonds are headed for a second week of gains after investors poured money into retail funds following a retreat last week. Two deals are expected to price Friday, bringing the week’s tally to more than $8b.
• Junk bond funds reported an inflow of $2b for the week, following a $5.5 billion exodus the week before
• Junk bond spreads and yields came under pressure as equities slumped and oil prices fell
• Spreads widened 8bps to close at +597 and yields jumped 7bps to 6.57%
• The index posted a second day of losses, down 0.12%
• Barclays’ strategist Brad Rogoff wrote on Friday that “the rising number of Covid-19 cases in the U.S. could potentially be a catalyst for another sell-off,” especially if states re-establish lockdowns. “The re-escalation of virus cases remain an overhang, potentially turning the V- shaped recovery into a W.”
• Stock futures wavered on the fears and oil prices slid as the International Energy Agency warned that a jump in virus cases could derail the economic recovery

(Wall Street Journal)  Judge Orders Pipeline Shut Down, Citing Faulty Environment Permit

• A federal judge ordered the Dakota Access pipeline to shut down by next month because it was improperly granted a key environmental permit, a major setback for operator Energy Transfer LP and the American shale-drilling industry.
• S. District Judge James Boasberg in Washington ruled Monday that the pipeline, which has been carrying oil since 2017, should be turned off until the U.S. Army Corps of Engineers completes a new environmental-impact statement. That process is expected to take 13 months.
• The ruling, which comes a day after the builders of the $8 billion Atlantic Coast Pipeline pulled the plug on that project, is the latest example of how difficult it has become for companies to get fossil-fuel conduits approved in the U.S. amid stiff opposition from environmentalists, landowners and Native American tribes.
• It comes as the Trump administration’s efforts to fast-track pipelines and other energy infrastructure projects have faltered amid legal challenges. The ruling threatens to further create hardship for American shale drillers operating in the Bakken Shale region of North Dakota, which have been rocked this year by falling demand for oil due to the coronavirus pandemic.
• “The Court does not reach its decision with blithe disregard for the lives it will affect. It readily acknowledges that, even with the currently low demand for oil, shutting down the pipeline will cause significant disruption to DAPL, the North Dakota oil industry, and potentially other states,” Judge Boasberg wrote.
• Energy Transfer said it planned to pursue all available legal and administrative remedies to stop the pipeline from being shut down.
• “We believe that Judge Boasberg has exceeded his authority in ordering the shutdown of the Dakota Access pipeline, which has been safely operating for more than three years,” spokeswoman Vicki Granado said.
• The court had previously found the Army Corps in violation of the National Environmental Policy Act when it granted approval to build and operate part of the pipeline that runs under Lake Oahe, a reservoir on the Missouri River, which straddles North and South Dakota.
• It said the Army Corps failed to produce a required environmental review.
• Owners of Dakota Access had told the court that they could lose as much as $643 million in the second half of 2020 and $1.4 billion next year if the pipeline is shut down.
• “There is no viable pipeline alternative for transporting the 570,000 barrels of Bakken crude that DAPL is capable of carrying each day,” the pipeline’s owners have said.
• Judge Boasberg acknowledged his decision will have substantial impacts for the oil industry in North Dakota, which has been struggling this year with low prices due to the drop in demand caused by the virus.
• “Yet, given the seriousness of the Corps’ NEPA error, the impossibility of a simple fix, the fact that Dakota Access did assume much of its economic risk knowingly, and the potential harm each day the pipeline operates, the Court is forced to conclude that the flow of oil must cease,” he wrote.

(Bloomberg)  Energy Transfer Isn’t Shutting Dakota Access Despite Ruling

• Energy Transfer LP said it’s not making any moves to empty its Dakota Access oil pipeline after a judge on Monday ordered the conduit shut while a more robust environmental review is conducted.
• The Dallas-based company run by billionaire Kelcy Warren said it’s also accepting requests for space on the pipeline in August. The U.S. District Court for the District of Columbia had ordered the pipeline to be drained by Aug. 5.
• “We are not shutting in the line,” Energy Transfer spokeswoman Vicki Granado said in an email when asked if the company had begun emptying the pipeline. Judge James E. Boasberg “we believe exceeded his authority and does not have the jurisdiction to shut down the pipeline or stop the flow of crude oil.”
• It’s the latest sign that Energy Transfer is preparing for yet another battle over the Dakota Access crude pipeline, which four years ago drew months of on-the-ground protests from environmental groups and tribes opposed to the project’s route across Lake Oahe, a dammed section of the Missouri River just a half-mile from the Standing Rock Indian Reservation in the Dakotas.
• In Washington, energy lobbyists have mused that the shutdown order would be difficult to enforce, according to three people familiar with the discussions.
• Height Securities LLC also predicts the unprecedented ruling to shut down Dakota Access because of a violation of the National Environmental Policy Act is unlikely to withstand review by the D.C. Circuit Court of Appeals, according to a research note for clients.
• When asked whether Energy Transfer plans to defy Boasberg’s decision if it remains in effect Aug. 5, Granado reiterated that the company doesn’t think he has the authority to shut the line. She later said Energy Transfer’s decision to refrain from emptying the pipeline isn’t meant as an act of defiance, “rather a statement to say we are not in the process of shutting in the line and do not believe he has the authority to order this.”

(Wall Street Journal)  Buffett’s Bet Is a Midstream Buy Signal

• After months of quiet browsing, Warren Buffett has finally found something worth buying.
• Berkshire Hathaway on Sunday announced an agreement to buy Dominion Energy’s midstream energy business for $9.7 billion including debt as Dominion shifts its focus to utilities. The purchase is right in Mr. Buffett’s wheelhouse: an old, out-of-favor sector he knows well.
• It probably is no coincidence that Dominion chose to unveil the deal alongside an announcement bidding farewell to its six-year-old Atlantic Coast Pipeline project, which it said faces too much regulatory uncertainty. Such concerns have dogged many high-profile projects. Notably, a federal court Monday ordered the Dakota Access Pipeline to shut down pending an environmental review.
• The deal’s timing might show that Mr. Buffett sees a silver lining in the regulatory headaches: More barriers for new pipeline build-outs could mean better value for existing ones. The pace of pipeline build-outs has long lagged behind the production of oil and gas; even with reduced production recently, pipelines will likely have plenty of business going forward. The acquisition also includes a 25% stake in the only operating liquefied-natural-gas export terminal on the East Coast.
• While caution is warranted, Mr. Buffett’s vote of confidence shines a light on the beaten-up sector’s value.

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were +$1.3 billion and year to date flows stand at $35.2 billion.  New issuance for the week was $15.3 billion and year to date issuance is at $184.8 billion.

(Bloomberg)  High Yield Market Highlights

• S. junk bond sales for June may top $45 billion by the end of Friday, making this one of the busiest months on record for issuance. Eldorado Resorts Inc. is expected to round out a busy week with billions of dollars of debt for its acquisition of Caesars Entertainment Corp.
• The issuance surge comes even as junk bond spreads and yields have come under pressure amid stock volatility and fears of a fresh outbreak of the coronavirus
• Spreads widened 16bps to 577bps more than Treasuries Thursday, yields rose 15bps to 6.42% and the index posted a loss of 0.33%
• But Barclays Plc strategists led by Brad Rogoff see spreads grinding tighter with the economic recovery expected to be faster than in previous contractions and the bar for a new round of widespread lockdowns high
• Stock futures are higher on a breakthrough in trade negotiations between America and China
• Investors are still putting cash into high-yield funds, albeit at a slower rate, with an inflow of $1.3b for the week. This was the 12th consecutive week of inflows
• The new issue market is still cranking out deals.

(Bloomberg)  Fed Will Begin Buying Broad Portfolio Of U.S. Corporate Bonds 

• The Federal Reserve said Monday that it will begin buying individual corporate bonds under its Secondary Market Corporate Credit Facility, an emergency lending program that to date has purchased only exchange-traded funds.
• The central bank also added a twist to its buying strategy, saying it would follow a diversified market index of U.S. corporate bonds created expressly for the facility.
• “This index is made up of all the bonds in the secondary market that have been issued by U.S. companies that satisfy the facility’s minimum rating, maximum maturity and other criteria,” the Fed said in a statement. “This indexing approach will complement the facility’s current purchases of exchange-traded funds.”
• The SMCCF is one of nine emergency lending programs announced by the Fed since mid-March aimed at limiting the damage to the U.S. economy by the coronavirus pandemic. With a capacity of $250 billion it has so far invested about $5.5 billion in ETFs that purchase corporate bonds.

(Bloomberg)  Delta Air CEO Sees Hitting Break-Even Around Spring of Next Year

• Delta Air Lines Inc. hopes to reach its break-even point by next spring as rising demand prompts the carrier to continue increasing flying capacity, Chief Executive Officer Ed Bastian said.
• “We are in the process of recovery, there’s no doubt about it,” Bastian said Thursday on Bloomberg Television. “There are clear signs the momentum we have is meaningful and continuing to build.”
• The Atlanta-based airline plans to add around 1,000 flights a day to its schedule in July and again in August, he said. U.S. airlines that had slashed flying have begun to put more planes in the sky as states lift stay-at- home orders and other limits on activity. Delta expects to operate about 30% of its year-earlier flying schedule by the end of September.
• “We’re at 15% of revenues today and we hope to get to 30% over the next two or three months, keeping costs at that 50% level,” Bastian said in the interview, with David Westin. “I would imagine by the spring next year, we’d be at a point where we’re break-even.”
• The U.S. Labor Day holiday in early September will be “an important milestone and pivot point” because it’s typically when business travel starts to build after summer, Bastian said.
• Delta is on track to burn about $30 million in cash this month, better than its target of reducing the figure to $40 million from $100 million earlier in the pandemic, Bastian said.
• He expects to reach zero by year-end. The airline has cut operating expenses by 55% since the coronavirus outbreak began to affect travel in March.
• Bastian said he doesn’t expect widespreadlayoffs at Delta after Sept. 30, when prohibitions against job cuts that are part of federal financial aid expire. About 40,000 employees have taken voluntary leaves, the company said at its annual meeting later Thursday.

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were +$4.4 billion and year to date flows stand at $29.5 billion.  New issuance for the week was $13.1 billion and year to date issuance is at $169.5 billion.

(Bloomberg)  High Yield Market Highlights

• S. junk bonds may steady on Friday after spreads widened the most in seven weeks. But after a volatile few days, would-be borrowers may stay on the sidelines for now.
• Spreads widened 46bps to 620bps over Treasuries on Thursday. They’ve widened almost 100bps since last Friday
• Yields jumped 44bps to 6.84%, the biggest increase in almost 12 weeks, according to data compiled by Bloomberg
• The pressure may ease with stock futures bouncing back after a dramatic sell-off spurred by concerns over a second wave of coronavirus infections and a slower-than-expected economic recovery
• The primary market has remained open amid the turbulence, but the pace has slowed with just two deals sold Thursday.
• Junk bond retail funds continued to see more inflows
• Junk bonds posted a loss of 1.35% on Thursday, the biggest one-day loss in more than seven weeks. They’ve posted losses for three straight days, the first time that’s happened since the week of May 11

(Bloomberg)  Wall Street’s New Bond-Ordering System to Launch by End of Year

• The joint venture between Wall Street’s biggest banks that’s looking to revolutionize the way new corporate bonds are marketed and sold plans to launch in the fourth quarter of 2020.
• DirectBooks LLC — backed by Bank of America Corp., Barclays Plc, BNP Paribas SA, Citigroup Inc., Deutsche Bank AG, Goldman Sachs Group Inc., JPMorgan Chase & Co., Morgan Stanley and Wells Fargo & Co. — will start by announcing new credit offerings on its platform, before enabling orders and allocations, according to Richard Kerschner, the company’s chief executive officer.
• The platform is preparing to go live at a time when demand for the new service has arguably never been greater. U.S. and European investment-grade corporate bond sales each smashed through the trillion-dollar and euro marks at the fastest pace ever this year, highlighting the need for a digitized process to buy and sell new deals, Kerschner said.
• Wall Street is looking to modernize the process of buying new corporate bonds that still relies on phone calls, instant messaging and emails to handle billions of dollars in orders.

(Bloomberg)  Fed Sees Zero Rates Through 2022, Commits to Keep Buying Bonds

• The Federal Reserve pledged to maintain at least the current pace of asset purchases and projected interest rates will remain near zero through 2022, as Chairman Jerome Powell committed the central bank to using all its tools to help the economy recover from the coronavirus.
• “We’re not even thinking about thinking about raising rates,” he told a video press conference Wednesday. “We are strongly committed to using our tools to do whatever we can for as long as it takes.”
• The Federal Open Market Committee earlier said it would increase its holdings of Treasury securities and agency residential and commercial mortgage-backed securities “at least at the current pace” to sustain smooth market functioning.
• A related statement from the New York Fed specified that the pace of the increase would be about $80 billion a month for purchases of Treasuries and about $40 billion of mortgage-backed securities.
• “Acting on mortgage-backed securities and Treasuries underscores their belief that more support is needed,” said Diane Swonk, chief economist with Grant Thornton in Chicago. “The Fed does not see a victory in the employment bounce-back. The risk of deflation is still high and the economy needs more support to heal more fully.”
• The Fed’s quarterly projections — updated for the first time since December, after officials skipped their March release amid the burgeoning pandemic — showed all policy makers expect the funds rate to remain near zero through the end of 2021. All but two officials saw rates staying there through 2022.
• The economy faces “considerable risks” over the medium term, the Fed said in its statement, reiterating language from the last FOMC meeting in late April.

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were +$5.3 billion and year to date flows stand at $16.6 billion.  New issuance for the week was $8.9 billion and year to date issuance is at $142.9 billion.

(Bloomberg)  High Yield Market Highlights

• Wesco International Inc. is poised to round out a busy month for the high-yield market. Its $2.825b deal is slated to price Friday, which could make May the third busiest month on record, according to data compiled by Bloomberg.
• Issuance month-to-date stands at $41b. Wesco’s issue would boost that to almost $44b
• Junk bonds have had a strong month with spreads tightening amid billions of cash inflows. S. high yield funds reported an inflow of $5.3b for the week
• High-yield spreads tightened 12bps to +631bps, the lowest since March 10. Yields fell below 7% for the first time since March to 6.97%
• “Spreads have rallied meaningfully over the past two weeks in response to reopening optimism, supportive market technicals, and macro data that have been better than feared,” Barclays Plc credit strategist Brad Rogoff wrote in a note on Friday
• While spreads may tighten more in the near term, longer-term risks remain, he said
• Other would- be borrowers may stay on the sidelines Friday with stock futures slipping amid tensions between the US and China.
• The junk bond rally continued with the index now gaining for eight straight sessions, the longest winning streak since January. It posted returns of 0.46% on Thursday
• CCCs were the best performers with returns of 0.84%. Spreads declined the most in six weeks to close at +1,198, while yields closed at 12.87%
• “Spreads for the lowest rated portion of the market have seemingly compressed toward the rest of high yield,” Barclays’ Rogoff wrote
• The rally was partly driven by constituent changes such as defaults, rating actions, and new issue
• “They do not look nearly as rich when accounting for these changes,” Rogoff wrote

(Bloomberg)  Williams Says Fed Thinking ‘Hard’ About Yield-Curve Control

• Federal Reserve Bank of New York President John Williams said policy makers are “thinking very hard” about targeting specific yields on Treasury securities as a way of ensuring borrowing costs stay at rock-bottom levels beyond keeping the benchmark interest rate near zero.
• “Yield-curve control, which has now been used in a few other countries, is I think a tool that can complement -– potentially complement –- forward guidance and our other policy actions,” he said in an interview Wednesday on Bloomberg Television with Michael McKee and Jonathan Ferro. “So this is something that obviously we’re thinking very hard about. We’re analyzing not only what’s happened in other countries but also how that may work in the United States.”
• Federal Reserve Bank of New York President John Williams says the Fed will use all of its available tools to best achieve its maximum employment and price stability goals.
• Yield-curve control — where the central bank caps yields on government bonds of a chosen maturity through potentially unlimited purchases — has been used by Japan for years to stimulate economic activity and was recently adopted in Australia. Investors see the Fed embracing the tool in coming months as policy makers turn their attention toward fostering a strong rebound from the severe downturn caused by the coronavirus pandemic.
• While May or June might mark the low point, “even if we are starting to see perhaps a stabilization there in terms of the economy and maybe a little bit of a pickup, we’re still in a very difficult situation,” Williams said.

(Wall Street Journal)  U.S. Rebukes Beijing On Hong Kong — Pompeo says state isn’t autonomous, in move imperiling its special trade status

• The U.S. no longer believes Hong Kong has a high degree of autonomy from China, Secretary of State Mike Pompeo said in a statement likely to unsettle the global financial center and certain to aggravate Beijing.
• The determination, announced Wednesday and required under federal law, amounted to a U.S. condemnation of China’s announcement of plans to impose greater control over Hong Kong, a move that triggered renewed protests against Beijing.
• The State Department under a 1992 law must assess the extent of the former British territory’s autonomy from China. It certified to Congress on Wednesday that the city is no longer autonomous.
• The decision opens the way for President Trump to take a range of possible measures, from revoking special arrangements on trade to imposing sanctions on people involved in suppressing civil liberties in the city.
• A Chinese spokeswoman in Washington accused the U.S. of meddling in its internal affairs and said pending national-security legislation that triggered the protests had no effect on Hong Kong’s autonomy or the rights of residents and foreign investors. “We will take necessary countermeasures in response,” she said.

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were +$5.2 billion and year to date flows stand at $11.3 billion.  New issuance for the week was $8.3 billion and year to date issuance is at $134.0 billion.

(Bloomberg)  High Yield Market Highlights

• S. junk bond issuance will likely slow ahead of the long weekend. More than $8 billion sold this week amid a rally that has seen spreads retreat to below 700 basis points for the first time since March.
• Average high-yield spreads have rallied 76bps since last Friday to 681bps over Treasuries, the lowest level since March 11, according to Bloomberg Barclays index data
• Investors are looking to past points of weakness as a possible guide to performance in coming months, according to Barclays Plc credit analysts led by Brad Rogoff
• “With corporate fundamentals likely to remain under meaningful pressure, we have an up-in-quality bias in the high yield market and prefer BBs,” they wrote in a note Friday
• Junk bond funds reported an inflow of $5.2 billion for week, the eighth straight week of inflows
• High-yield issuance is nearing $32b this month, making it the busiest May in five years. Seven deals for over $3 billion sold Thursday as borrowers rushed to clear the market before the Memorial Day holiday
• Junk bonds gained for the fourth consecutive session with returns of 0.4% on Thursday. Spreads fell 10bps to close at +681, still the lowest in 10 weeks. Yields dropped 14bps to 7.45%
• CCCs were the best performers on Thursday with returns of 0.69%. Spreads dropped 16bps to +1,309bps, a new 10-week low. Yields fell 15bps to 13.80%

(CNBC)  Powell says GDP could shrink more than 30%

• The U.S. economy could shrink by upwards of 30% in the second quarter but will avoid a Depression-like economic plunge over the longer term, Federal Reserve Chairman Jerome Powell told “60 Minutes” in an interview aired Sunday.
• The central bank chief also conceded that jobless numbers will look a lot like they did during the 1930s, when the rate peaked out at close to 25%,
• However, he said the nature of the current distress coupled with the dynamism of the U.S. and the strength of its financial system should pave the way for a significant rebound.
• Asked by host Scott Pelley whether unemployment would be 20% or 25%, Powell said, “I think there’re a range of perspectives. But those numbers sound about right for what the peak may be.”  Pressed on whether the U.S. is headed for a “second depression,” he replied, “I don’t think that’s a likely outcome at all. There’re some very fundamental differences.”
• In a part of the interview that did not air, Powell said shrinkage of U.S. economic growth “could easily be in the 20s or 30s,” according to a CBS transcript.
• “I think there’s a good chance that there’ll be positive growth in the third quarter. And I think it’s a reasonable expectation that there’ll be growth in the second half of the year,” Powell said. “I would say though we’re not going to get back to where we were quickly. We won’t get back to where we were by the end of the year. That’s unlikely to happen.”

(Bloomberg)  Yields Over 10% Keep on Coming in Deeply Split Junk Bond Market

• The junk bond market has become no stranger to double-digit yields.
• S. Steel Corp. is the latest to join the crowd, marketing a $1 billion secured offering at 12% that may also be discounted to entice investors. Northwest Fiber is sounding out interest for $250 million of unsecured bonds at 10.75%, also with a discount, to help finance an acquisition. Cooper-Standard’s secured deal of the same size sold at a 13.664% yield.
• The junk bond market has rallied to an average yield of 7.6% from a peak 11.7% in March. But that number can be misleading. It’s so bifurcated that many companies actually borrow either substantially below that rate, or in these cases Thursday, much higher. On top of the big interest expense, several of the riskier companies, like U.S. Steel and Cooper-Standard, are also pledging valuable assets to turn over to creditors should they not be able to pay in cash.
• The quality of that collateral has become increasingly important since creditors balked at the aging fleet put up by United Airlines Holdings Inc. in its recent attempt to borrow. United ended up pulling the deal, unwilling to borrow at the higher 11% yield investors demanded than what was initially offered.

(Reuters)  China move to impose security laws on Hong Kong

• Beijing is moving to impose new national security legislation on Hong Kong following last year’s often violent anti-China unrest that plunged the city into its deepest turmoil since it returned to Beijing rule in 1997.
• The introduction of Hong Kong security laws are on the agenda of the Chinese parliament which begins its annual session on Friday.
• The proposed legislation, which prompted concerns over freedoms in the semi-autonomous city, comes after large-scale and often violent pro-democracy demonstrations last year, which had already pushed some wealthy individuals to scout for investment options elsewhere.
• “In some cases where clients had a bit of inertia and hoped things that happened last year will just go away, they will now step on the gas to reduce their wealth concentration risk here,” said a senior banker at a European private bank.
• “In many cases last year, we saw our clients putting in place plan B and didn’t quite move the assets out of Hong Kong. I have already received some enquiries to activate that plan now,” said the banker, whose firm manages more than $200 billion in assets.

 Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were +$2.9 billion and year to date flows stand at $2.8 billion.  New issuance for the week was $8.1 billion and year to date issuance is at $113.8 billion.

(Bloomberg)  High Yield Market Highlights

• Barclays credit strategists led by Brad Rogoff have increased their forecast for full-year supply to $290b to $310b, driven by an increase in refinancings and general corporate purpose funding. The previous estimate was $240b to $260b
• “The midpoint of this estimate would represent the largest supply year since 2014. Several tailwinds should result in additional supply, including the need to fund negative free cash flow, as well as loan issuers’ turning to the bond market given a more supportive demand technical,” they wrote in a note Friday
• Investors continue to pour cash into the asset class with an inflow of $2.9b into U.S. high yield funds for the week
• This is the sixth straight week of inflows
• Junk bonds returned 0.22% yesterday, the third straight session of gains
• Heavy issuance hasn’t weighed on spreads which edged tighter again to +735bps, and are 10bp lower since last Friday. Yields fell 6bps to 7.93%

(Bloomberg)  New York Fed Says It Will Begin Buying ETFs in ‘Early May’

• The Federal Reserve is close to starting up two corporate lending programs that could buy up to $750 billion in debt and exchange-traded funds under its emergency coronavirus actions.
• The New York Fed announced on its website Monday that it expects to begin purchasing shares of eligible ETFs in early May through its Secondary Market Corporate Credit Facility. Lending through the Fed’s Primary- and secondary-market corporate credit facilities via purchases of corporate bonds will begin soon thereafter, it said. ETFs are included in the secondary facility and the program’s announcement in March had a major impact on that market.
• “Additional details on timing will be made available as those dates approach,” the New York Fed said.
• The corporate facilities are among nine emergency lending programs announced by the Fed to help shelter the U.S. economy from the pandemic and keep credit flowing. The move was a dramatic escalation of the central bank’s intervention, stepping into the corporate debt markets for the first time since the 1950s and including some sub-investment grade debt in the ETF purchases.
• The corporate programs are backed by the more than $2 trillion economic relief package passed by Congress. Businesses across the nation have shuttered to limit contagion and more than 30 million people have claimed unemployment benefits in the last six weeks. So far, only four programs are up and running.
• “Many companies that would’ve had to come to the Fed have now been able to finance themselves privately since we announced the initial term sheet on these facilities,” Fed Chair Jerome Powell said during an April 29 press conference. “The ultimate demand for the facilities is quite difficult to predict because there is this ‘announcement effect’ that really gets the market functioning again. Of course, we have to follow through, though. And we will follow through to validate that announcement effect.”

(Reuters) U.S. airlines burn through $10 billion a month as traffic plummets

• S. airlines are collectively burning more than $10 billion in cash a month and averaging fewer than two dozen passengers per domestic flight because of the coronavirus pandemic, industry trade group Airlines for America said in prepared testimony seen by Reuters ahead of a U.S. Senate hearing on Wednesday.
• Even after grounding more than 3,000 aircraft, or nearly 50% of the active U.S. fleet, the group said its member carriers, which include the four largest U.S. airlines, were averaging just 17 passengers per domestic flight and 29 passengers per international flight.
• “The U.S. airline industry will emerge from this crisis a mere shadow of what it was just three short months ago,” the group’s chief executive, Nicholas Calio, will say, according to his prepared testimony.
• Net booked passengers have fallen by nearly 100% year-on-year, according to the testimony before the Senate Commerce Committee. The group warned that if air carriers were to refund all tickets, including those purchased as nonrefundable or those canceled by a passenger instead of the carrier, “this will result in negative cash balances that will lead to bankruptcy.”

(Bloomberg)  Junkiest Junk Decays in Basement of Credit Rally 

• Investment-grade credit has recouped March losses and junk bonds are halfway back despite foul fundamentals and a deluge of new issuance. CCC debt didn’t rise with the tide and looks set to plumb new depths as the distressed cycle grips.