Author: Rich Balestra - Portfolio Manager

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were $0.02 billion and year to date flows stand at $0.8 billion.  New issuance for the week was $7.0 billion and year to date issuance is at $27.5 billion.

(Bloomberg)  High Yield Market Highlights

• US junk bonds are headed toward their biggest weekly loss in more than three months following losses for five sessions in a row, the longest losing streak since August. The week-to-date losses are at 1.01%, the most since November 4th. Yields jumped 26bps week-to-date to 8.14% after rising for five straight sessions, the longest rising streak since December. The losses extended across ratings snapping the two-week gains and ending the strongest start to a year since 2019. The sudden reversal after gaining four of the last six weeks this year came after payrolls data last Friday showed a strong jobs market, quashing hopes of the Federal Reserve pausing interest-rate hikes.
• The losses accelerated this week as a series of Fed officials reiterated their concerns about steady and stubborn inflation and the economic trajectory.
• “We need to attain a sufficiently restrictive stance of policy,” New York Fed President John Williams told a Wall Street Journal live event in New York.
• Minneapolis Fed President Neel Kashkari, an FOMC voter this year, echoed similar views at the Boston Economic Club saying rates need to be higher to combat wage growth.
• Better-than- expected macro data have called into question the “peak rates” narrative, which has been a key driver of the risk asset rally, Barclays’ Bradley Rogoff and Dominique Toublan wrote on Friday.
• Aside from Fed officials implying policy could become even more restrictive, the Fed’s Senior Loan Officer Opinion Survey (SLOOS) revealed a further tightening in bank lending conditions, and similar levels in the past have corresponded to higher forward default rates, Rogoff wrote in note.
• Even as concerns about inflation, slowing growth and Fed’s restrictive stance emerged, the primary market was open for business.
• 90% of the borrowers were just refinancing debt maturing this year or next. There was no aggressive use of proceeds such as dividend payment or funding LBOs.
• CCC yields jumped 31bps week-to-date to 12.64%, the first weekly increase this year, after rising for five consecutive sessions, the longest rising stretch since early November. CCC yields will end the five-week declining streak.
• CCCs are on track to end the week with losses. The week-to-date loss is as 0.66%.
• BB yields rose to a five-week high of 6.71% after advancing for five days in a row, the longest rising streak since September.

(Bloomberg)  Powell Says Further Rate Hikes Needed and Bonds Take Heed

• Federal Reserve Chair Jerome Powell stuck to his message that interest rates need to keep rising to quash inflation and this time, the bond market listened.
• In particular, Powell floated the idea during an event in Washington on Tuesday that borrowing costs may reach a higher peak than traders and policymakers anticipate.
• The talk was Powell’s first since last Wednesday, following the Fed’s decision to raise rates by a quarter point, when markets shook off his warning that rates were headed up and rallied anyway. The chair offered similar words again but, in the aftermath of a red-hot January employment report, they hit home harder.
• “We think we are going to need to do further rate increases,” Powell told David Rubenstein during a question-and-answer session at the Economic Club of Washington. “The labor market is extraordinarily strong.”
• If the job situation remains very hot, “it may well be the case that we have to do more,” he said.
• Much stronger than expected US government data on Friday showed employers added 517,000 new workers in January while unemployment fell to 3.4%, the lowest rate since 1969. Powell said the report “shows you why we think this will be a process that takes a significant period of time.”
• Bonds sold off after an initial rally as the Fed chair opened the door to a higher peak rate in 2023 if the job market doesn’t start cooling.
• His remarks suggest that the 5.1% interest-rate peak forecast by officials in December, according to their median projection, is a soft ceiling. Powell sounded willing to follow the data and move higher if necessary.
• The Federal Open Market Committee lifted its benchmark rate by a quarter percentage point to a range of 4.5% to 4.75% last week. The smaller move followed a half-point increase in December and four jumbo-sized 75 basis-point hikes prior to that.

This information is intended solely to report on investment strategies identified by Cincinnati Asset Management. Opinions and estimates offered constitute our judgment and are subject to change without notice, as are statements of financial market trends, which are based on current market conditions. This material is not intended as an offer or solicitation to buy, hold or sell any financial instrument. Fixed income securities may be sensitive to prevailing interest rates. When rates rise the value generally declines. Past performance is not a guarantee of future results.

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were -$0.1 billion and year to date flows stand at $0.8 billion.  New issuance for the week was $5.5 billion and year to date issuance is at $20.4 billion.

(Bloomberg)  High Yield Market Highlights

• US junk bonds rallied for the third straight session Thursday, posting their biggest one-day gain in three months, with returns of 1.18%, after Federal Reserve Chair Jerome Powell said that the process of disinflation has begun. Yields plunged to a more than five-month low of 7.73%, tumbling 30bps in their largest one-day drop in 12 weeks. Spreads tightened by the most in four months to close at a nine-month low of +386bps. The gains spanned across all high yield ratings on expectations that the Federal Reserve may be nearing the end of the tightening cycle. CCCs, the riskiest segment of junk bond market, posted the biggest one-day gains in more than two years, with returns of 1.52%. Yields plummeted to an eight-month low of 12.19%.
• Risk assets rallied on a higher probability of a soft landing, Barclays’ Brad Rogoff wrote on Friday
• The junk bond market is on track for its second consecutive week of gains, with week-to- date returns of 1.5%. The week-to-date returns for CCCs are at 2.23%, making them the best performing asset class within high yield
• The rally was fueled by Powell’s signaling that the bank was open to adjusting its rate hike plans if inflation fell faster than expected, implying that the Fed is flexible and would consider stopping rate hikes altogether
• Yields tumbled across ratings, with BB yields falling to a five-month low of 6.27% and spreads at a 10-month low of +240bps
• BBs also posted the biggest one-day returns in three months, with 1.08%
• Single B yields fell 33bps to 7.88%, the lowest since mid-August of last year. The index gained 1.22%, the largest one-day return since Nov. 10
• The primary market is expected to see a steady flow of new issuance after a relatively busy January.

(Bloomberg)  Fed Slows Rate Hikes Even as Powell Says There’s More Work to Do

• Federal Reserve Chair Jerome Powell said policymakers expect to deliver a “couple” more interest-rate increases before putting their aggressive tightening campaign on hold, even as they slowed their drive to curb inflation.
• Powell and his colleagues lifted the Fed’s target for its benchmark rate by a quarter percentage point to a range of 4.5% to 4.75%. The smaller move followed a half-point increase in December and four jumbo-sized 75 basis-point hikes prior to that.
• Still, investors took heart from the chair’s remarks acknowledging that price pressures have started to ease,despite his emphasis on the Fed’s outlook for more rate hikes.
• “We think we’ve covered a lot of ground,” Powell told reporters after the meeting. “Even so, we have more work to do.”
• The vote by the Federal Open Market Committee was unanimous.
• “The committee anticipates that ongoing increases in the target range will be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2% over time,” the Fed said in a statement issued after the two-day policymaking meeting, repeating language it has used in previous communications.
• In a sign that the end of the hiking cycle may be in sight, the committee said the “extent of future increases” in rates will depend on a number of factors including cumulative tightening of monetary policy. It had previously tied the “pace” of future increases to those factors.
• Powell, during his press conference, added to that sense.
• “We’ve raised rates four and a half percentage points, and we’re talking about a couple of more rate hikes to get to that level we think is appropriately restrictive,” he said.
• In another shift from its last statement, the Fed noted that inflation “has eased somewhat but remains elevated,” suggesting policymakers are growing more confident that price pressures have peaked.
• That compares with prior language where officials simply stated price growth was “elevated.”
• Investors wanted to know if Powell would push back against market expectations that the Fed will cut rates later in the year as inflation eases and economic growth slows. He did.
• “Restoring price stability will likely require maintaining a restrictive stance for some time,” he told reporters. While recent readings on price pressures were encouraging, he added that “I just don’t see us cutting rates this year,” if the economy evolves as he and his colleagues expect.

This information is intended solely to report on investment strategies identified by Cincinnati Asset Management. Opinions and estimates offered constitute our judgment and are subject to change without notice, as are statements of financial market trends, which are based on current market conditions. This material is not intended as an offer or solicitation to buy, hold or sell any financial instrument. Fixed income securities may be sensitive to prevailing interest rates. When rates rise the value generally declines. Past performance is not a guarantee of future results.

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were $0.6 billion and year to date flows stand at $2.2 billion.  New issuance for the week was $6.0 billion and year to date issuance is at $10.8 billion.

(Bloomberg)  High Yield Market Highlights

• US high-yield bonds snapped the five-day gaining streak to post the biggest one-day loss in three weeks as yields jumped from a four-month low of 8.03% to 8.16%. The losses were across the board, with CCCs, the riskiest segment of the junk bond market, ending the 12-day rally and posting negative returns for the first time in 2023. Junk bonds are heading toward modest losses for the week to end the two-week rally across all ratings. The recent gains in the US junk bond market were primarily fueled on expectations that moderating inflation will guide the Federal Reserve to slow down the pace of rate increases.
• Risk assets moved from easing inflation pressures back to concerns about an impending recession. A miss on retail sales drove the concerns this time, while Fed officials stuck to their guns and reiterated a “sufficiently restrictive policy” despite worsening data, Barclays’ Brad Rogoff wrote on Friday.
• Weakness in housing and manufacturing sectors continued to reinforce recession risks, Barclays added.
• The primary market was revived this week after the famine of 2022 by the recent two-week rally in junk bonds as yields and spreads dropped to a four- and a seven-month low, respectively, during the week.
• Nine borrowers sold $6b this week, the most in a week since January 2022.
• While junk bonds have had the strongest start to a year since 2009, with year-to-date returns of 3.66%, JPMorgan strategists warn that good news in terms of moderating inflation or the potential for a soft landing is already baked in the price. JPMorgan remain cautious on risk assets and are reluctant to chase the past two weeks’ rally as recession and over-tightening risks remain high.
• The rally may take pause to digest the recent economic data and the flood of new issues. Meanwhile, US equity futures struggle for direction as traders remained concerned over hawkish central banks, worsening economic data and earnings hiccups in the world’s largest economy.

(Bloomberg)  Some Fed Speak from the Week

• Federal Reserve Vice Chair Lael Brainard said interest rates will need to stay elevated for a period to further cool inflation that’s showing signs of slowing but is still too high.
• “Even with the recent moderation, inflation remains high, and policy will need to be sufficiently restrictive for some time to make sure inflation returns to 2% on a sustained basis,” Brainard said in prepared remarks Thursday for a University of Chicago Booth School of Business event.
• She didn’t explicitly state a preference for whether the Fed should downshift to a quarter-point rate hike at its next decision due Feb. 1, as traders expect. Brainard also didn’t say what peak rate she envisioned this year, with Fed officials’ median forecast at about 5.1% and markets expecting about 4.9% followed by rate cuts in the second half.
• Still, her overall message was broadly consistent with other policymakers’ comments that borrowing costs must remain high for a while. At the same time, Brainard discussed signs of cooling inflation and economic activity and suggested that jobs and prices could ease without a big loss of employment.
• Federal Reserve Bank of Boston President Susan Collins said she favors a moderate pace of interest-rate increases, even as the central bank continues to tighten policy to reduce high inflation.
• “Now that rates are in restrictive territory and we may — based on current indicators — be nearing the peak, I believe it is appropriate to have shifted from the initial expeditious pace of tightening to a slower pace,” she said Thursday in remarks prepared for delivery to a housing conference hosted by her bank. “More measured rate adjustments in the current phase will better enable us to address the competing risks monetary policy now faces.”
• “As monetary policymakers, restoring price stability remains our imperative,” she said. “Thus, I anticipate the need for further rate increases, likely to just above 5 percent, and then holding rates at that level for some time.”

This information is intended solely to report on investment strategies identified by Cincinnati Asset Management. Opinions and estimates offered constitute our judgment and are subject to change without notice, as are statements of financial market trends, which are based on current market conditions. This material is not intended as an offer or solicitation to buy, hold or sell any financial instrument. Fixed income securities may be sensitive to prevailing interest rates. When rates rise the value generally declines. Past performance is not a guarantee of future results.

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were $1.8 billion and year to date flows stand at $1.6 billion.  New issuance for the week was $1.9 billion and year to date issuance is at $4.7 billion.

(Bloomberg)  High Yield Market Highlights

• US junk bonds are poised to post gains for the second consecutive week as yields tumble to a more than four-month low of 8.11% after data showed that US inflation continued to slow, fueling hopes that the Federal Reserve may slow the pace of interest-rate hikes.  The gains in junk bonds spanned across ratings as CCCs look to be the best performers for the second week in a row, with week-to-date returns of 2.41%. The rally was also partly driven by cash inflows into junk bond funds.
• US junk bonds are having the best start to a year since 2019. with spreads at a five-month low of +419bps after tightening for eight straight sessions and yields at a more than four-month low.
• CCC yields, the riskiest of junk bonds, dropped below 13% to 12.92%, the lowest since mid-August, after falling for eight sessions in a row, the longest declining streak since September 2020.
• With falling yields and steady gains, the primary market has revived as companies begin looking to borrow again.
• US junk bond gains may pause ahead of bank earnings later today. US equity futures slid as investors assessed prospects for less- aggressive rate hikes and earnings from major banks for insights on the state of the US economy.

 (Bloomberg)  US Inflation Cools Again, Putting Fed on Track to Downshift

• US inflation continued to slow in December, adding to evidence price pressures have peaked and putting the Federal Reserve on track to again slow the pace of interest-rate hikes.
• The overall consumer price index fell 0.1% from the prior month, with cheaper energy costs fueling the first decline in 2 1/2 years, according to a Labor Department report Thursday. The measure was up 6.5% from a year earlier, the lowest since October 2021.
• Excluding food and energy, the so-called core CPI rose 0.3% last month and was up 5.7% from a year earlier, the slowest pace since December 2021.
• The data, when paired with prior months’ lower-than-expected readings, point to more consistent signs that inflation is easing and may pave the way for the Fed to downshift to a quarter-point hike at their next meeting ending Feb. 1. That said, the central bank’s work is far from over.
• Resilient consumer demand, particularly for services, paired with a tight labor market threaten to keep upward pressure on prices.
• The Fed is expected to raise interest rates further before pausing to assess how the most aggressive tightening cycle in decades is impacting the economy. Policymakers have emphasized the need to hold rates at an elevated level for quite some time and cautioned against underestimating their will to do so. Investors are still betting the central bank will cut rates by year end, despite officials saying otherwise.
• Shortly after the report was released, Philadelphia Fed President Patrick Harker said the central bank should lift interest rates in quarter-point increments “going forward” as it approaches the end point in its hiking campaign.
• Shelter costs — which are the biggest services component and make up about a third of the overall CPI index — increased 0.8% last month, an acceleration from November. Rents and owners’ equivalent rent both rose by the same amount, while hotel stays advanced 1.5% after falling in the prior month.
• Because of the way this category is calculated, there’s a delay between real-time measures — which currently show rents are beginning to decline — and the Labor Department data.
• Given wages make up a large share of these businesses’ costs, economists expect the labor market to play a key role in the inflation outlook. The latest jobs report showed some cooling in earnings growth, but hiring remains robust and the unemployment rate fell to match a five-decade low.
• The persistent imbalance between labor supply and demand remains firmly entrenched, underpinning wage growth and consumer spending at a time when the Fed is trying to slow it down. A separate report Thursday showed inflation-adjusted average hourly earnings rose 0.4% from the prior month, the most in five months. Still, they were down 1.7% from a year earlier.
• While it’s broadly expected for annual price growth to substantially slow this year, a lot of uncertainty remains as to how far inflation may fall and whether the Fed’s rapid rate increases ultimately tip the US into recession.

(Bloomberg)  Private Credit Muscles Out Banks, With Worrisome Consequences

• War, inflation and recession fears proved to be devastating for financial markets in 2022. Yet in private credit—one of the most opaque corners of Wall Street, where small groups of institutions and financiers make loans directly to companies—the picture has never looked brighter.
• Private credit has grown quickly, hitting $1.4 trillion of assets under management globally at the end of 2022, up from about $500 million in 2015, putting it on par with the US junk bond market. Research firm Preqin expects private credit to grow to $2.3 trillion by 2027.
• Private credit, like private equity, raises capital from investors, typically large institutions such as pension funds and insurance companies. But instead of taking ownership of a company, as private equity funds do, private creditors lend the money to companies, bypassing banks.
• Because the loans are often used to finance acquisitions by private equity funds, the two industries are intertwined. Many of the largest private equity firms have developed massive private credit operations. The largest, such as Apollo Global Management, Ares Management and Blackstone, have become a force in capital markets, often carrying enough weight to make or break multibillion-dollar acquisitions.
• Yet the inherently risky industry receives little oversight. Most private credit funds and business development corporations, which are companies that hold the assets in a loan portfolio, are only required to make basic quarterly disclosures to the US Securities and Exchange Commission. They aren’t overseen by banking regulators. And most private credit funds haven’t lived through a prolonged recession, which typically brings a spike in defaults.
• Private credit funds are now in direct competition with banks, which have collected hefty fees by acting as intermediaries between companies and investors. That tension was on full display last year, when banks were forced to pare back lending after higher interest rates saddled them with more than $40 billion of debt they were unable to offload, including for the buyout of Twitter Inc. and Citrix Systems Inc. “Historically, private equity firms have felt that the most efficient way to raise capital” has been through banks, where they can get a market price and more transparency, says Andrew McCullagh, managing director and portfolio manager at Hayfin Capital Management in London. “But banks have reduced their appetite to arrange and underwrite, and the direct lending market has naturally moved in to fill that vacuum.

This information is intended solely to report on investment strategies identified by Cincinnati Asset Management. Opinions and estimates offered constitute our judgment and are subject to change without notice, as are statements of financial market trends, which are based on current market conditions. This material is not intended as an offer or solicitation to buy, hold or sell any financial instrument. Fixed income securities may be sensitive to prevailing interest rates. When rates rise the value generally declines. Past performance is not a guarantee of future results.

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were -$0.6 billion and year to date flows stand at -$48.5 billion.  New issuance for the week was $2.2 billion and year to date issuance is at $104.9 billion.

(Bloomberg)  High Yield Market Highlights

• U.S. junk bonds snapped a six-day rally as yields surged 13bps to 8.45%, marking the biggest one-day loss in more than five weeks, after central banks signaled more rate hikes are needed to cool the rate of inflation.  Fed Chair Jerome Powell reiterated the central bank’s hawkish stance and said the bank is not close to ending its rate-hike campaign to tame inflation, a sentiment echoed by European Central Bank President Christine Lagarde.
• The hawkish tilts from the FOMC and ECB reversed the more positive sentiment earlier in the week spurred by a slowdown in the consumer-price index, Barclays’s Bradley Rogoff wrote on Friday.
• Bloomberg economists Anna Wong, David Wilcox and Eliza Winger wrote that the most striking part of the updated economic projections by the Federal Reserve “is how unified the committee is on the need to raise rates more aggressively – significantly higher than the 4.8% terminal rate markets had priced in ahead of the meeting.”
• The losses spanned across all high yield ratings. BB yields rose 11bps to 6.77%, the biggest one- day jump in four weeks. The BB index posted the biggest one-day loss in more than five weeks and ended a six-day gaining streak.
• CCC yields rose 13bps to 13.79%. The index posted a loss of 0.37% on Thursday, the most in more than two weeks, after gaining for five straight sessions.
• The junk bond primary market has ground to a halt, with just a little over $2b in new bond sales month-to-date, the slowest since December 2018. The rest of the year is expected to be quiet on the new issue front as investors work on the year- end closings.

(Bloomberg)  Powell Says Fed Still Has a ‘Ways to Go’ After Half-Point Hike

• Chair Jerome Powell said the Federal Reserve is not close to ending its anti-inflation campaign of interest-rate increases as officials signaled borrowing costs will head higher than investors expect next year.
• “We still have some ways to go,” he told a press conference on Wednesday in Washington after the Federal Open Market Committee raised its benchmark rate by 50 basis points to a 4.25% to 4.5% target range.
• Powell said that the size of the rate increase delivered on Feb. 1 at the Fed’s next meeting would depend on incoming data — leaving the door open to another half-percentage point move or a step down to a quarter point — and he pushed back against bets that the Fed would reverse course next year.
• “I wouldn’t see us considering rate cuts until the committee is confident that inflation is moving down to 2% in a sustained way,” he said. “Restoring price stability will likely require maintaining a restrictive policy stance for some time,” he said.
• “The committee anticipates that ongoing increases in the target range will be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2% over time,” the FOMC said in its statement, repeating language it has used in previous communications.
• “It is our judgment today that we are not at a sufficiently restrictive policy stance yet,” the Fed chief said. “We will stay the course until the job is done.”
• Powell had previously signaled plans to moderate hikes, while emphasizing that the pace of tightening is less significant than the peak and the duration of rates at a high level.
• The decision follows four consecutive 75 basis-point hikes that have boosted rates at the fastest pace since Paul Volcker led the central bank in the 1980s.

This information is intended solely to report on investment strategies identified by Cincinnati Asset Management. Opinions and estimates offered constitute our judgment and are subject to change without notice, as are statements of financial market trends, which are based on current market conditions. This material is not intended as an offer or solicitation to buy, hold or sell any financial instrument. Fixed income securities may be sensitive to prevailing interest rates. When rates rise the value generally declines. Past performance is not a guarantee of future results.

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were -$0.3 billion and year to date flows stand at -$47.8 billion.  New issuance for the week was nil and year to date issuance is at $101.2 billion.

(Bloomberg)  High Yield Market Highlights

• The recent rally in U.S. junk bonds has been steadily losing steam, edging lower for three consecutive sessions in the run up to a likely modest weekly loss, after warnings from bank chiefs of a slowing economy next year renewed recession fears. The losses extended across ratings as yields rose 17bps week-to-date to 8.55%.
• Market tone has softened since mid-October, according to Barclays strategist Bradley Rogoff.
• Focus will be on next week’s CPI data and Fed meeting for indications on future rate hikes and terminal rate expectations, wrote Rogoff on Friday.
• The rally, though more muted this week, also opened a window for banks to offload a portion of their large hung LBO debt.
• A group of banks found willing buyers for $750m of debt tied to the buyout of Citrix Systems.
• Thursday end with spread levels of 446 for the high yield market. Spreads by rating:  283 for BB, 464 for B, and 983 for CCC.
• Year-to-date the high yield index total return stands at -10.13%.

This information is intended solely to report on investment strategies identified by Cincinnati Asset Management. Opinions and estimates offered constitute our judgment and are subject to change without notice, as are statements of financial market trends, which are based on current market conditions. This material is not intended as an offer or solicitation to buy, hold or sell any financial instrument. Fixed income securities may be sensitive to prevailing interest rates. When rates rise the value generally declines. Past performance is not a guarantee of future results.

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were -$0.6 billion and year to date flows stand at -$47.5 billion.  New issuance for the week was nil and year to date issuance is at $101.2 billion.

(Bloomberg)  High Yield Market Highlights

• U.S. junk bonds are poised to gain for the fourth straight week, the longest winning streak since mid-August, with yields tumbling to mid-September lows after Federal Reserve Chair Jerome Powell signaled on Wednesday that the central bank will likely slow the pace of interest-rate increases. The biggest gains came on Thursday, when the market saw its best advance in more than three weeks after the Fed’s favored inflation gauge posted a smaller-than-expected monthly advance and data showed a cooling in the manufacturing sector.
• The inflation measure, the personal consumption expenditures index, rose 0.3% in October, less than the 0.4% forecast by economists.
• The rally that followed the release Thursday drove the junk-bond market to a weekly gain of 0.88% and pushed yields down to 8.43%, a more than 11-week low.
• The gains spanned across ratings. CCC yields fell significantly below 14% to close at 13.83%, a more than 11-week low.
• CCCs are also headed for the fourth straight week of gains, with week-to-date returns of 0.73%. The 0.99% gains on Thursday were the biggest one-day rally in three weeks.
• The recent rally in the junk bond market was also partly fueled by lack of supply. The primary market is expected to largely remain quiet as banks work out of the losses from this year’s leveraged buyout debt.
• October was the slowest month for new bond sales since 2008, with a mere $3.7b. November ground to a halt after a promising start to end with a modest $9b, the slowest for that month since 2018.
• Year-to-date supply at $95b has also been the lightest in 14 years.
• Junk bonds are losing steam early Friday post stronger than expected employment data.

(Bloomberg)  Powell Signals Downshift Likely Next Month, More Hikes to Come

• Chair Jerome Powell signaled the Federal Reserve will slow the pace of interest-rate increases next month, while stressing borrowing costs will need to keep rising and remain restrictive for some time to beat inflation.
• His comments, in a speech Wednesday at the Brookings Institution in Washington, likely cement expectations for the Fed to raise interest rates by 50 basis points when they meet Dec. 13-14, following four straight 75 basis-point moves.
• “The time for moderating the pace of rate increases may come as soon as the December meeting,” Powell said in the text of his speech. “Given our progress in tightening policy, the timing of that moderation is far less significant than the questions of how much further we will need to raise rates to control inflation, and the length of time it will be necessary to hold policy at a restrictive level.”
• The Fed’s actions — the most aggressive since the 1980s — have lifted the target range of their benchmark rate to 3.75% to 4% from nearly zero in March. Powell said rates are likely to reach a “somewhat higher” level than officials estimated in September, when the median projection was for 4.6% next year. Those projections will be updated at the December meeting.
• Investors see the Fed pausing hikes in the second quarter once rates reach about 5%, according to pricing in futures contracts.
• Powell said the central bank is forecasting 12-month inflation based on its preferred gauge, the personal consumption expenditures price index, of 6% through October, and a 5% core rate.
• There hasn’t been enough strong evidence to make a convincing case that inflation will soon decelerate, he said.
• “It will take substantially more evidence to give comfort that inflation is actually declining,” he said. “The truth is that the path ahead for inflation remains highly uncertain.”
• He added that “despite the tighter policy and slower growth over the past year, we have not seen clear progress on slowing inflation.”
• Powell launched into a discussion of service costs, focusing on scarce supply in the labor market, with the gap in labor-force participation mostly explained by pandemic-era retirements in his view.
• “These excess retirements might now account for more than 2 million of the 3 1/2 million shortfall in the labor force,” he said.
• He said the labor market is only showing “tentative signs” of what he called “rebalancing,” while wages are “well above” levels consistent with 2% inflation over time.

This information is intended solely to report on investment strategies identified by Cincinnati Asset Management. Opinions and estimates offered constitute our judgment and are subject to change without notice, as are statements of financial market trends, which are based on current market conditions. This material is not intended as an offer or solicitation to buy, hold or sell any financial instrument. Fixed income securities may be sensitive to prevailing interest rates. When rates rise the value generally declines. Past performance is not a guarantee of future results.

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were $4.7 billion and year to date flows stand at -$55.1 billion.  New issuance for the week was $1.5 billion and year to date issuance is at $93.5 billion.

(Bloomberg)  High Yield Market Highlights

• U.S. junk bonds are set for the biggest weekly loss in six, snapping a two-week gaining streak as yields surge to 9.22% as recession fear spurred a selloff in equities and an extreme inversion in a key portion of the Treasury yield curve. The low-grade market erased most recent gains across ratings. CCCs, the riskiest of junk bonds, posted a loss of 1.04% Thursday, the biggest one-day fall in more than four months. That’s put the notes on track to end a two-week gaining stretch, with a week-to-date drop of 1.08%.
• The October rally fueled and lured investors into junk bond market as US high-yield funds reported a cash intake of $4.7b for the week, the third biggest weekly inflow this year.
• The cash haul came in at the time of acute shortage of new supply, bolstering secondary market prices as investors looked for new paper. The primary market was mostly quiet until this week.
• The rally brought some relief to bankers who have long waited to clear all pending deals to fund leveraged buyout. Apollo’s Tenneco was the first to get out of the gate earlier this week. Nielsen Holdings, a US TV rating business firm, kicked off a bond sale Wednesday to fund its buyout by Elliott Investment Management and Brookfield Asset Management.
• Satellite TV company Dish Network also jumped into the market Wednesday to start marketing 5-year notes to fund the build-out of wireless infrastructure, among other purposes.
• The rally was sapped after the Federal Reserve signaled a higher terminal rate against a backdrop of slowing growth.
• Despite continued near-term  pressures Morgan Stanley expects a “significant deceleration in the inflation path” to take hold by mid-2023, Morgan Stanley’s Srikanth Sankaran wrote last week.

(Bloomberg)  Powell Sees Higher Peak for Rates, Path to Slow Tempo of Hikes

• Federal Reserve Chair Jerome Powell opened a new phase in his campaign to regain control of inflation, saying US interest rates will go higher than earlier projected, but the path may soon involve smaller hikes.
• Addressing reporters Wednesday after the Fed raised rates by 75 basis points for the fourth time in a row, Powell said “incoming data since our last meeting suggests that ultimate level of interest rates will be higher than previously expected.”
• Powell said it would be appropriate to slow the pace of increases “as soon as the next meeting or the one after that. No decision has been made,” he said, while stressing that “we still have some ways” before rates were tight enough.
• “It is very premature to be thinking about pausing,” he said.
• The Federal Open Market Committee said that “ongoing increases” will still likely be needed to bring rates to a level that are “sufficiently restrictive to return inflation to 2% over time,” in fresh language added to their statement after a two-day meeting in Washington.
• The Fed’s unanimous decision lifted the target for the benchmark federal funds rate to a range of 3.75% to 4%, its highest level since 2008.
• “Slower for longer,” declared JP Morgan Chase & Co, chief US economist Michael Feroli in a note to clients. “The Fed opened the door to dialing down the size of the next hike but did so without easing up financial conditions.”
• Officials, as expected, said they will continue to reduce their holdings of Treasuries and mortgage-backed securities as planned.
• The higher rates go, the harder the Fed’s job becomes. Having been criticized for missing the stubbornness of the inflation surge, officials know that monetary policy works with a lag and that the tighter it becomes the more it not only slows inflation, but economic growth and hiring too.
• Still, Powell stressed that they would not blink in their efforts to get inflation back down to their 2% target.
• “The historical record cautions strongly against prematurely loosening policy,” he said. “We will stay the course, until the job is done.”
• Fed forecasts in September implied a 50 basis points move in December, according to the median projection. Those projections showed rates reaching 4.4% this year and 4.6% next year, before cuts in 2024. Powell’s remarks made clear that the peak signaled in that projection would be higher if it came at this meeting.
• No fresh estimates were released at this meeting and they won’t be updated again until officials gather Dec. 13-14, when they will have two more months of data on employment and consumer inflation in hand.

This information is intended solely to report on investment strategies identified by Cincinnati Asset Management. Opinions and estimates offered constitute our judgment and are subject to change without notice, as are statements of financial market trends, which are based on current market conditions. This material is not intended as an offer or solicitation to buy, hold or sell any financial instrument. Fixed income securities may be sensitive to prevailing interest rates. When rates rise the value generally declines. Past performance is not a guarantee of future results.

Fund Flows & Issuance:  According to a Wells Fargo report, flows week to date were $3.7 billion and year to date flows stand at -$59.9 billion.  New issuance for the week was nil and year to date issuance is at $92.0 billion.

(Bloomberg)  High Yield Market Highlights

• U.S. junk bonds are headed for their biggest weekly gain in more than three months after a four-session rally as investors flooded the market with cash looking for new paper. A gauge of the debt rose 0.57% Thursday, the biggest one-day gain in more than three weeks. It was headed for the best week since June, up 1.93% so far this week.  The rally was partly fueled by investors returning to the asset class as US high-yield funds reported a cash influx of $3.7b for the week.
• The cash haul came at a time when the junk bond primary market faced an acute shortage of new supply, helping to bolster secondary-market prices.
• October supply is down by more than 85% from 2021; The year-to-date supply is the lowest since 2008 at $92b, versus more than $415b for the same period last year.
• The recent rally in junk bonds suggests the high-yield market is slowly coming around to the view that inflation’s pace is slowing and may begin to decline in the middle 2023.
• Despite continued near-term pressure, Morgan Stanley expects a “significant deceleration in the inflation path” to take hold by mid-2023, Srikanth Sankaran wrote on Monday.
• A potential window of respite from rates volatility and a more dispersed period of earnings risk should help to provide tactical support for credit markets, Sankaran wrote.
• Amid this issuance-starved market, a group of banks led by Citigroup may sell as soon as next month part of a leveraged loan that’s financing Apollo’s buyout of Tenneco, according to people with knowledge of the matter.
• The rally extended across all high yield ratings. Yields tumbled to a five-week low of 9.12% after falling for five sessions in a row, the longest declining streak in almost three months. Yields fell 56bps in the last four sessions.
• Single B and BB rated bond yields also fell to a five-week low of 9.35% and 7.33%, respectively.
• CCCs, the riskiest of junk bonds are up 1.52% this week as of Thursday, set for the biggest weekly advance in almost three months. CCC yields dropped 38bps this week to close at 15.44%, a more than two-week low.

This information is intended solely to report on investment strategies identified by Cincinnati Asset Management. Opinions and estimates offered constitute our judgment and are subject to change without notice, as are statements of financial market trends, which are based on current market conditions. This material is not intended as an offer or solicitation to buy, hold or sell any financial instrument. Fixed income securities may be sensitive to prevailing interest rates. When rates rise the value generally declines. Past performance is not a guarantee of future results.